Becoming an owner not a consumer

Bet on the casinos not on the tables

I’m personally not a big fan of gambling as casinos have an edge over their customers. Even if the casino loses the winning punter tends to splurge on restaurants and shopping sprees within the casino giving the casino owners another opportunity to take the money back. That’s why I was interested in looking at Macau’s casino stocks which have halved over the past year. The halving in these stocks was enough of an excuse to go on a plane and have a closer look. Meeting with gaming executives I was curious to see whether they gambled and if so where. They can’t gamble at their own casino but the answer was always no. Of course they don’t gamble they know the statistics involved! On average whenever a mass market gamer drops $100 on the table they walk away with $75 leaving the casino with $25. VIPs are treated better on average walking away with $97 after spending $100. After meeting with them it reminded me that it pays to be an owner rather than a consumer of a good business.

Becoming an owner and not a consumer

As consumers we know a lot about what we buy and why we like it over competing products. We can use this to benefit our portfolios. If people really like the product we should consider the stock. Some businesses (like casinos) are so profitable that management and staff would rather own the business than use the product.

As for Macau it is struggling in February gaming revenues were down by half due to the austerity and anti-corruption campaign in China. High rollers are not taking the risk of being seen gambling. It’s not worth drawing attention to themselves as the risk of a corruption investigation means that they may never be seen again. Macau’s future lies in catering to mass market consumers not VIP’s. Macau has plans to become like Las Vegas where it is as much about buffets, shows and conventions than just gambling. The leader in this transformation is Las Vegas Sands (LVS). They are famous for owning theme based properties such as the Venetian in Macau and Marina Bay Sands in Singapore. The Marina Bay Sands casino is their newest addition with a beautiful infinity pool on top it holds a 94.8% occupancy rate at an average daily rate of $414. Both of these properties give guests unrivaled entertainment, shopping, conventions and even Gondola rides. They are aiming for a travel experience rather than the gambling only properties commonly seen in Macau.

The Vegas strip Macau style

Las Vegas Sands had the vision to construct the equivalent of the Las Vegas Strip in Macau calling it the Cotai Strip. They even built the land! Cotai was a land reclamation project joining two islands together. The reclaimed land is being developed to rival the Las Vegas Strip in entertainment having already passed it in gambling revenues. Las Vegas Sand properties including the Venetian have prime position on the strip. They are also opening a French themed casino the Parisian Macau in 2016. Las Vegas Sands not only owns the casinos but the hotels and shopping malls at its properties.

Source: Las Vegas Sands investor presentation

Macau versus Vegas

The transition from VIP’s to mass market customers will be difficult due to Macau’s high table minimums. It’s amazing that the average minimum bet last year was around US$250 this has been trending down to around $40 at some tables. The threshold for opening a VIP account has also been lowered from over USD$25,000 to $13,000. As these levels reset the longer term trend looks more promising as less than 2% of Chinese have visited Macau versus the 10% of Americans who have been to Las Vegas. There are 16,000 hotel rooms in Macau increasing to 28,000 over the next three years compared to 160,000 in Vegas.

While China’s anti-corruption drive is having an effect longer term the structure of the market is promising. The casinos are not like the hotel business where anyone can compete. The casino market in Singapore is a duopoly there are only two players Marina Bay Sands and Resorts World Sentosa. There are also only six operators allowed in Macau. It is not like America where if someone has the money they could build a casino. Short term the environment looks tough but the casinos always have an edge against their customers. It pays to listen to the gaming executives be an owner not a consumer of a great business. Bet on the casinos not on the tables.

Jason

http://www.decisiveassetmanagement.com/

Decisive does not have a long position in Las Vegas stock (LVS). 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.

Industries change but sin stays the same

Consumers are adopting new products faster than ever before. Change that historically took decades now occurs in years. Finding industries with growth and staying power is key. You could manufacture the best VCR or horse carriage but it didn't matter when DVD's and cars came along!

Source: http://www.nytimes.com/imagepages/2008/02/10/opinion/10op.graphic.ready.html

A major driver of stock performance is the industry. Whether the industry is in growth or decline can have a significant effect on a stock. We can see this industry effect in Australia with the end of the mining boom it didn't matter which iron ore stock you owned they all fell. Credit Suisse has provided us with some historical charts detailing the impact of industry change. We can see this in the composition below of the USA and UK  markets.

Source: Credit Suisse Global Investment returns yearbook 2015

Rail stocks dominated the market with over 50% of total equity value but 115 years later are less than 1% of both markets. New industries such as technology in the US and oil and gas in the UK sprung up to take their place. With change accelerating it is becoming more difficult for investors but over history one thing stays the same. The out performance of so called sin stocks. In the USA the best performing industry was tobacco and in the UK alcohol. Both industries show dramatic out performance of the market. I'm not a big fan of products that potentially kill your customers (smoking) but I definitely do understand the need for a drink when Friday comes around.

Source: Credit Suisse Global Investment returns yearbook 2015

These two industries share many similarities. Both products are addictive and its hard to see how the industry could get disrupted. They tend to have high margins as their input costs are quite low. These products tend to be branded unlike the poorer performing industries like the paper, steel or textile industry where sales prices are commoditised. Some of the oldest companies in the world are involved in the alcohol and beverage industries. We can never know what the future holds but we can be certain that a hundred years from now human nature will remain the same. Drinking, gambling and smoking seem to be a very Australian past time. We're likely to see these so called sin industries at the top of the next hundred year list.

Jason

http://www.decisiveassetmanagement.com/

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.

Yoox Net-a-porter its all about the box

In big news two leaders of the online luxury market have agreed to merge in a market changing transaction. YOOX is known for its operations expertise running the back end technology and logistics for luxury brand sites. While Net-a-porter runs its own luxury branded site. Clued into the fashion world Net-a-Porter even produce their own magazine whose content is becoming even more important for social media and sales. The combination will let each partner lean in on each others strengths. I mean look at Yoox's boxes they could sure use Net-a-Porters fashion sense!

Just like Tiffany it's all about the box

Together the pair would claim about 15% of the online luxury market with 2.1 million customers. It's the perfect transaction creating a market leader and being accretive in the first year there is a reason the stock was up on the news. Even with the rise the combined company trades at a EV/EBITDA discount to Asos and Zalando.

The fashion partner of choice
According to McKinsey online sales represent only 4% of the luxury retail industry but are expected to grow at double digits for the next couple of years. Bain and Co estimates that 40% of luxury brands don't sell their bags online. These online brands are realising that more and more people are buying online and even more researching online before they buy. Most luxury brands just need a partner. As can be seen below there will be three business lines.

Source: Yoox Net-A-Porter presentation 

The two businesses are complementary Yoox is known as an off price brand while Net-a-Porter is in season. They are also successful in different markets Net a Porter is big in the UK while Yoox is big in Italy. I'm normally skeptical of 'revenue synergies' but I think it makes sense in this case with more customers and different offerings they will be able to serve more customers and more importantly brands. The merger will accelerate growth they expect no redundancies in the company. The combined entity is too big for luxury brands too ignore. There is no one else with scale that luxury brands can work with. As can be seen below Amazon and other sites trade on value for money. Their average orders are too low for luxury brands.

Source: Yoox Net-A-Porter presentation 

Opening doors to the world's luxury fashion store
The smart part about the transaction was how it was structured. Richemont (who owned Net-a-Porter) will own 50% of the entity but only have 25% voting rights so that the combined entity will remain independent. This independence is important because of Yoox's relationship with luxury retailers. With increased customers and offerings the combined company should be able to convince other luxury brands to transact online. As the founder of Net-a-Porter says "the best way to predict the future of fashion is to create it." With YOOX's operational savvy and Net-a-Porters fashion sense the future of fashion is here.

 Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in Yoox (YOOX).

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.

Amex can't leave home without it?

American Express (AXP) cards are the choice of corporates and affluent individuals. It is the largest integrated payments platform in the world processing over $1 trillion in commerce. Yet AXP is struggling, they are parting ways with their largest customer Costco and have lost a government anti-trust lawsuit. They are operating in a more competitive environment with banks that are happy to earn low single digit returns on their cards business to cross sell other banking products. It seems that investors are leaving home without it.

Source: Amex investor day

Largest integrated processor means they know what you buy
AXP business model is unique in that they are integrated (see above). They own the network and are a card issuer and merchant acquirer. They have a direct relationship with their millions of card members and merchants. While Visa and Mastercard are the middle men (network only) whose direct customers are banks. AXP's advantage is that it knows where we buy, the time, the category of goods and whether it is online or offline. They have a unique data set that could be very valuable. They are already benefiting by having fraud rates half that of Visa and Mastercard because they are able to detect and stop fraud earlier.

When it rains it pours Costco and DOJ
Costco was their largest co-brand customer (see below). The lower returns and constraints on serving competitors of Costco was too much for AXP to reapply. While Costco is a loss (10% of their cards) it allows them to explore relationships with other retail partners. AXP is positive that they can retain the majority of Costco customers as over 70% of their spending on the card occurs outside of Costco warehouses. As a co-branded product the customers are as much theirs as Costco's. They are also appealing the anti-trust ruling that allows retailers to steer customers to payment methods other than AXP. Losing the Costco card exclusivity contract actually reduces the anti-trust risk.

Source: Amex investor day

Don't leave home without it?
Like Visa and Mastercard AXP is benefiting from the move away from cash to card. Yet AXP is a very different business model to the Visa/Mastercard networks. As mentioned before they are integrated taking on the financing risk of mainly credit spend not debit. This integration helps with analytics but it means the banks are a competitor to AXP whereas banks are customers of Visa/Mastercards network. Still AXP is a prestige brand AXP card members spend three to four times more on average than Visa and Mastercard customers.

On a 14x multiple the stock looks good especially compared to the networks multiples but a concern is management keeping their EPS target for 2017. AXP believe they can return to targeted growth of 12-15% by 2017 but competition has stepped up. It seems there should be a number of headwinds. The strong dollar should continue to affect international revenues and net write offs near historic lows of 1.5% should increase going forward. We believe this earnings uncertainty will lead the stock to trade in a range for the next year until investors get confidence in management targets or more likely targets get lowered. For the time being we prefer the networks like Visa but AXP is one to watch.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a long position in American Express (AXP) or Mastercard (MA) stock but is long Visa (V).

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.

Sotheby's a great bubble indicator

Low interest rates have stocked demand for real assets such as property, equities and even arts and collectibles. It has also increased talk of bubbles. It's hard to pick the pricking of a bubble but one of the most reliable indicators has been Sotheby's (BID). As many of you know BID is the auctioneer of fine arts and collectibles. They are highly reliant on a booming/speculative economy.

Looking at a chart of BID its share price has picked the top of many bubbles. Ranging from the Japanese boom in 1989, the tech boom in 1999, housing/oil boom in 2007. While it has threatened to make new highs in 2011 and 2014 it hasn't made a substantially new high since 2007. This suggests that talk of a equity bubble might be premature and we should stay long the market.

Source: Bloomberg

Oldest company listed on the New York Stock Exchange
As an investment itself Sotheby's (BID) is starting to look interesting. For such a cyclical company BID has stood the test of time. It was founded in 1744 in London to auction a couple of hundred valuable books. BID is the oldest company listed on the New York Stock Exchange. It has the characteristics of a great business as there are only two auction houses of substance BID and Christie's. Christie's is privately owned by French billionaire Francois Pinault who purchased the company for $1.2 billion in 1998. It is a great long term duopoly market with no other comparable listed peer. While it might seem like a simple matching making business they add value through performing due diligence to authenticate and determine ownership of the property being sold.

Source: Sotheby's investor day

Some change will do you good
This past week BID announced the appointment of Tad Smith ex Madison Square Garden and Starwood as CEO. Tad replaces the old CEO who has served in his role since 2000. He held very little shares in the company while receiving country club perks and a driver. Though Tad has little art experience he has experience in growing brands.

This change should be welcomed by investors as previous management have not fully taken advantage of the buoyant art market. As seen above sales have rebounded to peak levels but EBIT is nowhere near peak.

Help from activists
Shareholder activists are here to help. Third point and Marcato two well regarded activist funds own 19% of BID. They are pushing management to make better use of their capital. They are arguing for share buybacks and release of capital by selling and leasing back their London and New York headquarters. BID has shown great timing by purchasing their New York headquarters on February the 6th 2009 for $370 million subject to a $235 million mortgage. They are currently reviewing options on whether or not to sell. BID has a board to match its illustrious history including such names as the Duke of Devonshire. Thankfully Dan Loeb has appointed himself and two other members to the board. Interestingly Danny Meyer the Shake shack co-founder is also a board member.

No dummy bids here
During the financial crisis in 2008 BID guaranteed minimum prices for nearly half of their artwork. Obviously this didn't do to well as markets for everything around the world crashed. BID has hedged this risk by entering into contracts with dealers and other third parties to pass on this risk. They are entitled to receive a share of the commission if the property sells. One problem for BID is that the art market just like the equity market is cyclical and we are in the sixth year of what is normally a five to seven year cycle.

Bid on a 271 year old company
You can't marry someone hoping that they will change. Company management and performance is similar, underperformers will continue to under deliver and outperformers will continue to surprise on the upside. The change of CEO should bode well for the future of what is essentially a duopoly business and a scarce asset.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a long position in Sotheby's (BID) 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.

Drinking with Jack

Brown Forman (BFB) is a pure play investment in American whisky. Their main product Jack Daniels needs no introduction. It is one of the best known spirit brands in the world selling 11.5 million cases last year. They have a portfolio of 30 other spirit, wine and cocktail brands such as Finlandia, Southern Comfort and Canadian Mist. Their products resonate with Australians. Australia is the single largest market outside of the US being 12% of overall sales with ready to drink Jack Daniels a big driver.

Whisky keeps on performing
BFB is a consistent long time performer. Not many companies have been around for 35 years let alone growing at 10% over that period. Some of the world's oldest companies are in the alcohol or pub business, no matter what technological change occurs in the future people will still be drinking whisky. As you can see below Whisky is the fastest growing spirits category.

Source: Brown Forman investor day

Source: Brown Forman investor day

Innovation on fire
Modern updates of their core Jack Daniels has introduced more consumers to the brand. Jack Daniels Honey has attracted more females and millennials. Honey is now a top 20 brand with 1 million cases sold above $25 per bottle all within four years. BFB have also released Jack Daniels Tennessee Fire a cinnamon liqueur. It's slogan puts hair on your chest then burns it right off! So far it is tracking ahead of Honey's rollout growing 1.3x Honey's growth rate.

Like most established brands BFB is an emerging market story. Their Jack Daniels brand has a 28 year compound annual growth rate of 20% overseas compared to 4% in developed markets. Another way to look at is Jack Daniels has 13.7% share of value in the US versus 6% in the rest of the world.

A friend of Jack
The Jack Daniel's brand is a rare asset, most growing spirit companies are not listed. Their competitor Jim Beam was taken over by the Japanese company Suntory who paid $16 billion including debt approximately 20 times trailing EBITDA BFB trades at 18x.

Source: Brown Forman investor day

You can see above that everyone is a friend of Jacks. Their combination of a great heritage brand like Jack Daniels and its innovation around honey and cinnamon will likely mean another great 35 years for the brand.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a long position in Brown Forman (BF/B) 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.

Starbucks caffeinating you, your portfolio and your property

Starbucks (SBUX) is world famous for selling coffee they are also famous for their store locations. SBUX spends very little on marketing preferring to spend on an ever expanding number of stores with some of the best prime locations. If you're everywhere you don't need to advertise!

Location Starbucks
This real estate expertise was backed up by Zillow the American real estate research site. They conducted research on key factors that would indicate an increase in property prices. Among the most consistent indicators was proximity to a SBUX store. They found that homes located within a quarter mile of a SBUX's store have gone up by 96% compared to 65% for all US homes. Dunkin donuts was up only 80%. As the distance to store increased the property increase became smaller.

Balanced growth not frothy
Can it still grow stores? Most of SBUX growth will come from overseas in particular Asia where they can grow their 1,500 stores in China to 5,000. Otherwise SBUX is maximising the locations it already has. It has multiple revenue opportunities such as increasing food contribution which is 19% of transactions, evening offers like wine and cheese and the big one this year is digital ordering.

Source: Starbucks William Blair Conference

Espresso express 
SBUX is trialing express order and pay in their Portland stores. The great thing about express ordering is that customers will have to sign up as a rewards member. This should help retain the customer making them even more loyal to SBUX which they can leverage for one to one marketing. So far results are above expectations. They are seeing a lot of curiosity from other customers when others are ordering direct. SBUX also plans to trial order and delivery from mid 2015. Hopefully this can extend the impact of their location premium!

SBUX's is dominant in the US and is replicating this success in Asia. Shanghai has the most SBUX stores 320 of any city in the world. SBUX is trading on a high multiple but they aren't many companies out there that sell an addictive product with long term profit growth targets of 15-20% that can also increase your house price. The next time you're at SBUX make sure you budget some time to look at local property.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in Starbucks (SBUX) 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.