Disney it's all about movies and no selfie sticks

No selfie sticks. That was the message Disney sent to consumers lining up for rides last week. The signs make it official guests must stow their selfie sticks on rides. A number of rides mainly Space Mountain and Big Thunder Mountain have had to be stopped due to selfie-stick use. Apparently other theme parks have installed metal detectors in lines! Disney is a forward thinking technology company with Sheryl Sandberg of Facebook and Jack Dorsey of Twitter on the board but even Disney have had enough.  All we need to worry about is visitors using drones to take photos!

https://twitter.com/Jaunted/status/565181794467581952/photo/1

When you see the behavior above it all makes sense and comes ahead of the opening of Shanghai Disney Resort scheduled to open sometime next year. There are 330 million income qualified residents within a three hour travel radius of the park hopefully they will have the selfie-stick ban from the get go.

Source: http://mashable.com/2015/05/19/selfie-sticks-disney-world/

For all the talk of selfie sticks the studio performance of Disney is key. A hit movie creates a waterfall effect for the business. A hit movie creates high box office revenues for Disney, it creates demand for toys, Disney can open new rides getting consumers to stay at the park (remember no selfie-sticks on rides) and finally re-monetise shows on Disney TV. If you're a parent they will get your money somewhere! With the new park in Shanghai Disney and the opening of its first Chinese store Disney has the potential to replicate this success in China.

Source: Disney investor presentation

Its interesting to look at Disney's upcoming movie lineup. Their acquisitions of Pixar, Marvel and Lucasfilms (Star Wars) have set them up to dominate the box office for the next few years. The recently released trailer for the upcoming Star Wars movie has already been viewed 52 million times. The releases above are a great leading indicator for the future success of their business. Disney haven't been specific but they will be opening Star Wars themed attractions at Disney. These new rides and the banning of selfie-sticks give families even more reasons to go to Disneyland.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long 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.

Investing tips from Jeff Bezos and Larry Page

Everyone is always looking for the next great stock tip from hedge fund gurus. But no one seems to bother to analyse the performance of corporate CEOs and how they invest. Warren Buffet's Berkshire Hathaway is the exception but companies like Google and Amazon have been also widely successful investors. How do they allocate capital?

Jeff Bezos mentioned his ideal investment in his latest shareholder letter. No surprise but the ideal investment sounded like Amazon! (See below). An ideal investment has four characteristics. Customers love it, it can grow to a very large size, it has strong returns on capital and its durable in time.

Source: https://www.sec.gov/Archives/edgar/data/1018724/000119312515144741/d895323dex991.htm

When investing Jeff is famous for asking what won't change in the future. For example what won't change in the future is that customers will always love low prices. So Amazon focuses their investments to improve things that won't change ie customers will always love greater selection, faster shipping and lowest prices on their site. In a fast moving world focusing on the fundamentals that won't change has paid off for Amazon and their shareholders.

Google's Larry Page has a simpler approach. Each investment has to pass the toothbrush test. They will invest in a product or company when it has the potential to be used by hundreds of millions of people hopefully twice a day. That sounds like Google to me. I use it much more than my toothbrush! Instead of worrying about capital returns and free cash flows Page takes the long term view and cares about how useful it will be not how much money it is making. Something to think about next time you're brushing your teeth.

Jason

http://www.decisiveassetmanagement.com/

Decisive has no position in Amazon (AMZN) but is long Google (GOOG) 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.

Time Warner the cheapest way to play TV streaming?

Internet television has taken off with Netflix, Amazon and Hulu leading the way. Investors have had less choice with Netflix being the only pure investment choice Hulu is not listed and Amazon streaming comes along with a retail and cloud business (not too bad a problem to have). Netflix has been the default it is bigger than every other cable network in the US with the average user consuming nearly 2 hours of content a day. The release of HBO Now from Time Warner (TWX) gives consumers and investors new options. HBO is the premium TV service but until recently it was only available on cable.

HBO Now will target the 10 million homes with broadband who don't have a cable subscription. There are also 70 million households in the US that pay for cable but do not have HBO. It's an experience you've probably had but as a premium service HBO has been promoted as an add on to the basic cable bundle. According to Fast Magazine the average HBO pay TV bill added up was $130, HBO Now at $15 is a much more compelling offer. It is also a much cheaper option for investors. TWX is a not a pure play internet streaming investment but they are media content owners having Warner Brothers and the Turner network on their team. Both these services have the potential to be integrated into HBO now or in their own app.

 Note Netflix subscribers as of 31st March 2015, HBO December 2014 numbers include Cinemax subscribers.
HBO has around 30 million domestic subscribers  not including Cinemax.

Source: Netflix 10Q and TWX 10K

In the Game of Thrones you win or you die
HBO Now has 2,800 hours of library and output deals with 4 Hollywood movie studios. Including the most popular TV show of all time Game of Thrones. Management have mentioned that their Turner, Cartoon Network and Warner Brothers content could expand online. I'm expecting TWX to integrate all services or at least release separate apps. Warner Brothers has over 80,000 hours of programming include Harry Potter, Lego and Lord of the Rings and releasing Batman versus Superman next year.

http://time.com/3825376/best-movie-streaming-service-netflix-hbo-hulu-amazon/

Netflix wins on range and pricing with a large list of all time classics though I would argue HBO's originals are better quality. Netflix will pick up the slack on movies next year with an agreement with Disney which will include output like the Avengers and Star Wars. While there is a focus on originals approximately 40% of HBO subscribers only watch movies it is the number one reason for subscribing. Last year 14 of the top 25 films were on HBO (see other stats above). They have long term agreements with Warner Brothers (which they own), Fox, Universal and Summit which comes up for renewal in 2017. There is concern over HBO cannibilising themselves but I believe a lot of households are not subscribers because it is marketed as a premium extra service. As a standalone offer I believe it provides great value.

Netflix or HBO? Both
I believe that both services complement each other. It is a case of both rather than either/or currently 85% of Netflix subscribers are also cable subscribers.TV is not a winner take all market there will be plenty of users who subscribe to both. Netflix stands out for its large selection and HBO for its quality original series and movies. The battle will be interesting as Netflix tries to become HBO faster than HBO can become like Netflix. HBO has priced their service at $15 a premium to Netflix's $9.

The risk with TWX and other media companies are declining advertising revenues. Netflix's on demand add free business model is impacting TV advertising and ratings. Advertising is 17% of revenues TWX has the lowest advertising exposure compared to peers.


Investors have a new streaming option

Source: TWX investor day

TWX should see a re-rating of its stock. In the past year it has spun off its publishing business and with the release of HBO Now is giving consumers more access to their content. TWX trades at a 16.5x forward multiple a slight discount to the market. It's earnings have grown in the high teens % over the past 6 years and as above is expected to earn more than $8 a share in 2018 a near doubling of earnings from 2014. We also believe the stock could see a decent re-rating of the multiple as investors look for another way to get exposure to TV internet streaming.

Jason

http://www.decisiveassetmanagement.com/

Decisive has no position in Time Warner (TWX) or Netlfix (NFLX) 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.

R&D It's not the size that counts but what you do with it

Innovation is the key to business. It's an old technology saying if you can't predict the future then you have to invent it! The only constant is change and we need to change just to keep up. I always thought research and development would be the best way to measure innovation. Yet looking at research and development spend as a % of sales Apple the most innovative company over the past ten years spends very little (see below). Apple's $6 billion R&D pales in comparison to Microsoft's $11.4 billion. Facebook spends just under half Apple's but as % of sales are reinvesting heavily in messaging and virtual reality applications.

Research and Development spend as % of sales

Source: Bloomberg

Surprisingly Apple does not even make the top 20 list on an absolute basis, click
below to enlarge. I never would have though of Volkswagen being the most innovative company.

Source: http://www.strategyand.pwc.com/global/home/what-we-think/innovation1000/top-20-rd-spenders-2014

Thankfully Bernstein released a report last year asking "Do high R&D spenders in tech generate stock outperformance". They found that companies with the lowest spending on R&D tended to out perform the best. Companies that spent up to 17% of sales on R&D outperformed higher spending companies over 1,3,5-10 year periods. Their research showed that stocks in the lowest third of spend have outperformed since 1977 with a 5 year average out performance of nearly 8%. It's a little counter intuitive but large R&D spend does not equate to better stock performance. It's all about scale and productivity. Productivity is harder to measure so we can only judge based on products. Luckily we can look around us to get a better feel on product innovation. How many people do you see with Microsoft phones and tablets compared to Apple products. Don't worry about R&D spend the customer votes on innovation with his wallet.

Jason

http://www.decisiveassetmanagement.com/

Decisive has a long position in Apple and Google 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.

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.