Decisive is an international fund for Australian investors.
As consumers the majority of products and technology we use are foreign owned but as investors we typically only invest in Australia. We invest in global companies especially the US to give you exposure to these growth opportunities while diversifying your portfolio.
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.
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.
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.
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.
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.
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.
Facebook's (FB) mission is to make the world more open and connected whether its on PC's or mobile phones. But the question is what communication platform will be next? FB has bet $2 billion that Oculus rift the virtual reality leader will be a new communications platform. The majority of time spent on mobile phones is gaming 40% and communications 40% with FB having half the market share in communications. Virtual reality should be able to combine these two activities.
The matrix is here just plug in
Virtual reality is about tricking your brain. You are no longer looking at a screen instead you get a 110 degree view which gives you a feel that you are in the environment. Just like other platforms virtual reality needs software or apps to showcase what it can do. Oculus has focused first on gaming but down the track they plan to extend into other fields like training and travel. See the reaction of first time users below, it really tricks your body into thinking that you are actually there.
A holiday in your room
But its not only FB even Marriott is making a bet on the future. Marriott's hotels are a great place to stay on vacation. But if you can't afford a trip to Hawaii Marriott have produced a holiday experience. Users are transported to the destination for 100 seconds. This experience took 3 months to create. Pumps in the floor create the sensation of sand under your feet. Marriott is also adding other elements such as mist, heat and wind. The technology called the Teleporter (see below) will help guests to virtually explore locations such as Hawaii and London.
The transporters will be available for a couple of days at 8 key MAR hotel sites in the US. The software development comes from the same company that produced Ascend the Wall for the recent Game of Thrones tour that came to Sydney. Marriott hopes that consumers can use the Teleporter to experience different locations before booking a trip and of course a Marriott hotel. Oculus is still tinkering with a development kit that will cost you $350. Its been rumoured that a product will be available for the general public next year. The matrix has finally arrived.
Disclosure: Decisive has a long position in Facebook (FB) 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.
Walking in crowds is difficult in the best of times. The rise of smart phones has added extra difficulty. We have all probably experienced the mobile dance. When you have to correct course as someone is paying more attention to their phone than where they are going. That's why I was interested to see this week that China was trialing a smartphone only lane, hopefully so smartphone users can only crash into other smartphone users!
Life is truly in the 'text lane' in Chongqing, China where city authorities have designated a 100 foot cellphone lane for texting while walking. I'm looking forward to when this takes off around the world. So far residents seem to be stopping and taking photos of the below sign then properly using the lanes!
As an investor I am always interested in new consumer trends or habits. So what are our thumbs doing on these phones? In the US users are either on Facebook, Twitter or playing games (see below). According to the Comscore US Mobile app report a staggering 42% of all time spent occurs on the individual's most used app. The app field is dominated by Facebook, Google, Apple, Yahoo, Amazon and eBay. They account for 9 of the top 10 most used apps, 16 of the top 25, and 24 of the top 50.
Source: Comscore the US Mobile App Report
However these are just US numbers what about China? The data is similar but the companies are different. The top app list is dominated by Tencent, Alibaba and Qihoo. The most used app is Tencent's Wechat a Chinese messaging service similar to Facebook. Alibaba's Taobao, UC Mobile browser and Alipay are also top apps. Alibaba is dominant in e-commerce with 80% marketshare it is even more dominant on mobile with 86% share. Alibaba has learnt from Facebook's mistake they have already proven that they can monetise mobile increasing mobile rates in December 2013 though they are still half that of desktop (see below).
Source: Alibaba roadshow
According to iResearch only 22% of China's population have shopped online this compares to 37% of the population using their mobiles to access the internet. We expect both these numbers to increase. Tencent and Alibaba should be the biggest beneficiaries especially if more text lanes are created.
Disclosure: Decisive has no position in Alibaba (BABA) or Tencent (700) 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.
Dreamworks
Animation (DWA) is a computer generated film studio best known for its characters such as Shrek, Madagascar, Kung Fu Panda and
How To Train Your Dragon. These characters have entertained millions around the world but investors have had to read from a different script. Being a studio that is reliant on releasing two successful films a year has made it difficult for the company to grow. It also makes it hard for investors to analyse as a hit or a miss film can have a major impact on the company. It is not a great long term business model when you only make money twice a year when a film is released resulting in a stock that is down 34% year to date. Transforming from a studio into a global branded family entertainment company
However like all good animated films DWA is planning on having a happy ending. DWA feels it finally has enough characters to move aggressively just from film into television, consumer products,
digital content and location based entertainment. A similar model to Disney that relies on multiple revenue streams. Instead of watching
DWA twice a year at the movies fans can watch 365 days a year on
Netflix and TV keeping their characters front of mind. Their recent initiatives include:
·Launching their own television production unit in
partnership with Netflix and with Super RTL and Planeta Junior in Europe
·Finalised arrangements for their Chinese joint
venture known as Oriental Dreamworks including an indoor theme park
·Acquired Awesomeness TV a popular channel among
young teens with more than 100 million subscribers on Youtube
·Bought Classic media the owner of some of the
great kids content in the world see below
·Building a consumer product business to unlock
their library of content.
·DWA changed distributor to FOX and received more
attractive distribution economics.
Netflix a no risk deal
The DWA TV deal with Netflix is one of the great media
deals. DWA will provide Netflix with 300 hours of original programming. Amazingly
DWA will own the rights to the content after an exclusive period. Over a 3-4 year period of time DWA will
accumulate over a $1 billion worth of programming that will be extremely valuable if
they ever want to launch their own channel similar to say a Disney Junior. It is a godfather deal in the movie business its a deal with no downside.
There are no performance requirements DWA just has to
produce the shows to get paid. DWA effectively gets paid to build a content
library that they can monetise once their exclusivity period expires. It’s a
smart move to forgo cable television in favour of Netflix which is the
future of TV viewing. It keeps DWA characters front of mind with Netflix being a compelling pitch to parents as the shows are
commercial free. DWA has guided to $250m in TV sales by 2015 up from $106
million in 2013 in context DWA total sales in 2013 were $724m. Turbo is a good
example of the change even though the film fell short of expectations, the Turbo
series launched in December on Netflix is on track to become one of the most
popular kid’s series ever on their platform.
Not that sort of library
Media companies are valuable for their library of content. These older shows have already been expensed and tend to be high margin cash generative businesses. Digital distribution has
opened up the value of film libraries with Netflix and iTunes etc creating a larger market
for on demand titles versus just linear TV scheduling which is limited by range
and choice that it can show viewers. Producing 2 films a year is not a great way for DWA to build up a library so they have been actively acquiring content recently paying for Classic Media. Classic
Media owns 3,600 hours of programming including Casper, Where’s Wally, Lassie,
Rocky & Bullwinkle (see above). Much like Disney with the Avengers and Lucasarts DWA will
reintroduce these characters to a new generation reducing the risk of trying to
create new franchises from scratch. Parents tend to gravitate towards
characters they are familiar with as children when buying gifts for
their own. Hidden within this
acquisition are also the rights to the Golden Books library whose titles have
sold more than 2 billion copies but have yet to be exploited digitally.
China friendly characters (Pandas & Dragons)
Disney had a 50 year headstart on DWA in the US but in China
the playing field is level. DWA had a little luck with the release of Kung Fu
Panda in 2008 as the story set in ancient China resonated with the China
market. 6 out of the top 10 animated films in China were produced by DWA. DWA
has a JV in China that will make animated and live action films including the
upcoming Kung Fu Panda 3. DWA has long term plans to eventually IPO the China
business. China is expected to be the largest box office market by 2020. The How to Train your Dragon 2 opening weekend in China grossed $25.9 million nearly 8x higher than the original.
Balance sheet mess
With writedowns on three of its last four movies Turbo, Rise of the Guardians and Peabody DWA's balance sheet is looking stretched. There is also a contingent payment estimated to be $91.8m that will be be paid to Awesomeness TV based on certain earnings and performance targets in 2014 and 2015. However DWA will receive cash from Netflix on delivery on the TV shows and How to train your dragon 2 (which has now grossed $609 million after a soft start). Fortunately going forward DWA is releasing a number of other sequels including Penguins of Madagascar (see trailer above) and Kung Fu Panda 3. Its unlikely that DWA will lose money on these films. DWA also announced news of an SEC investigation into the timing of the write down of Turbo. Since the announcement DWA has put in place a new CFO. In our opinion it is hard to see much more bad news.
How to train your dragon happy meals
DWA is leveraging consumer
products for future movies signing toy deals with Hasbro for two upcoming films
Trolls in 2016 (remember that crazy hair?) and BOO Bureau of Otherworldly
Operations in 2015. In the past year DWA opened up an office in Arkansas just for the
merchandising team at Walmart. DWA's 2013 hit The Croods had little or no consumer programs at retail compared to How to train your dragon 2. This branding
also extends to licensing with Royal Caribbean themed cruises, 3 theme parks in
Russia and hotel deals with Sands China and similar deals to the Dreamworks
experience on the Gold Coast. Licensing is a substantial opportunity currently DWA is ranked 16th in the top global licensors behind Westinghouse with Disney being number 1.
Having more licensing revenue including recurring
and more predictable television fees is a welcome sight for investors. These
initiatives have impacted earnings on the cost side yet looking
forward DWA should provide investors with growth, diversification and more stable earnings an ending investors should be happy with.
Disclosure: Decisive has a long position in Dreamworks (DWA) 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 Walt Disney Company (DIS) is the King and Queen of entertainment. It dominates the movie, TV, toys and theme parks business by owning 6 of the top 10 franchises in the world. Favorites such as Disney Princess, Star Wars, Winnie the Pooh, Cars, Mickey and Toy Story. DIS owns the licensing entertainment category with 80% market share. DIS also entertains sports fans around the world with its ownership of ESPN. DIS is a monopoly in entertainment helping to keep both adults and kids glued to its screens and products.
Add another hit Frozen
If you have a young daughter like I do you will know all about Frozen. It has grossed $1.3 billion worldwide at a production cost of $150 million. It is the fifth highest grossing movie and highest grossing animated film of all time. Frozen is now officially a key franchise for Disney and is so popular they are running out of merchandise, 9 out of the 10 highest selling items at Disney stores in the 2Q were Frozen products. To cap it all off Frozen is now headed to broadway.
Investors can party like Ewoks
DIS has successfully integrated its acquisitions of Pixar and Marvel and they appear to be doing the same with Lucasfilm. Like the Marvel acquisition Lucasfilm and Star Wars provides a literally rich universe that DIS can develop and monetise. DIS has announced that they will launch a new Star Wars film every year starting in 2015. Alternating between three new episode films with standalones based on characters rumoured to be Yoda, Boba Fett and Han Solo. Marvel's relatively unknown Guardians of the Galaxy movie has already grossed nearly $600 million, the upcoming Star Wars films should be able to do much more. With DIS's recent track record investors should be preparing to party like the Star Wars Ewoks (little furry creatures in the original series).
Theme park MyMagic+++
DIS also provides families with the ultimate theme park vacations which are always fun but hectic. MyMagic+ is an electronic wrist band introduced into the parks earlier this year to help manage and plan trips. The MyMagic+ band will let you better control your vacation allowing you to enter the park, your room, pay for food and allow characters to recognise who you are just with the device. It will also store all your information including reservations and help schedule the best times so you can spend more time with what you enjoy best. See the Incredibles explanation video below.
Technology is so important to DIS that they added Jack Dorsey the Chairman of Twitter and CEO of Square to the board alongside Sheryl Sandberg of Facebook.
2015 a big year
The main problem with DIS is that they are doing so well. Shanghai Disney (43% owned by DIS) will open at the end of 2015 it will be nearly 3x the size of Hong Kong Disneyland. DIS will also release two blockbuster movies the first of three new Star Wars films (episode VII) and a followup to Avengers. Its a good problem to have though releasing these two films and the opening of Shanghai Disney will make next year tough to beat.
In any other industry DIS will be deemed a monopoly they have a strangle hold on the best characters and entertainment. They are also accelerating growth and are just beginning to monetise the Lucasfilm (Star Wars) and Marvel acquisitions. DIS is great at keeping its customers both adults and kids constantly engaged. Their parks are the vacation drawcard while their Disney Channels beamed into 428 million home keeps the dream alive in-between. DIS is a company that its customers can't live without.
Disclosure: Decisive has long a position in Disney (DIS) 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.
