Hershey making your own Willy Wonka factory

Chocolate lovers around the world know all about Hershey (HSY). HSY manufacturers some of the most classic and craved for American treats such as its Chocolate Kisses, Reese's peanut butter cups and Jolly Rancher candy. HSY's stood out from the crowd with its unique chocolate shapes and wraps. HSY plans to stay ahead of competitors by co-developing a 3D printer that can deliver printed edibles ie a chocolate printer (see below).

Source: http://money.cnn.com/2014/01/16/technology/3d-printer-chocolate/

Your own personal vending machine

Earlier this year HSY announced a partnership with 3D systems to co-develop a printer to make your own chocolate. HSY believes that the printer could act as a new distribution/delivery system for its products. While 3D systems sees it as a way to help 3D printing go mainstream. It will be a multi-year joint development and though the machine can take any chocolate HSY will provide guidelines for achieving HSY like chocolate quality. It will be like having your own personal chocolate vending machine. It will be a very dangerous product to have in the office, if you get hungry just press print! It will be customisable so you can create your own shapes or even your own Willy Wonka landscape. Unfortunately there is still no word on when the chocolate printer will be available or the price. For me I think I'll stick with the original my favourite is the largest Kisses (see below) which weighs 1.27 kg filled with normal sized kisses.

Spreading Kisses around the world
Large consumer product companies tend to be slow growers because they are distributed everywhere and consumers already purchase the product. This is true of HSY in the US where they are dominant but they are just beginning to grow overseas. Only 16.6% of HSY's sales are to customers outside of the US with 5% or a 1/3 of overseas sales going to Canada. HSY is pushing hard into emerging markets especially China making its largest acquisition ever of Shanghai Golden Monkey China's 6th largest chocolate company. HSY plans to increase China sales by a factor of seven over the next five years by introducing other products like Jolly Rancher and Reese. Its HSY kisses candy was its first product in China to reach $100m in annual sales outside of the US and has grown 20 fold over the past 5 years.

Source: http://www.thehersheycompany.com/pdfs/fact-book.pdf

This international growth potential has helped HSY to be recently ranked as the fastest growing large consumer products company with sales over $5 billion by Boston Consulting Group and IRI.

Source: http://www.candyindustry.com/articles/86135-study-hershey-fastest-growing-large-cpg-company

The US confectionery market is tough its made up of over 1,200 brands and approximately 1,000 

companies. However only 15-20 of the 1,000 companies have national distribution. HSY has a monopoly like position with 44.5% market share of the US chocolate market. HSY can use this strong position to grow overseas. As an example Mondelez the owner of Oreo's receives 80% of its sales outside North America while HSY is the exact opposite with 16% of sales overseas. HSY's also has a decent 2.3% dividend yield which is above the S&P500 yet as seen above it is also one of the fastest growing consumer packaged goods companies. HSY's strong US market share combined with its emerging market growth and 3D printer opportunities makes for an appetizing stock just like its products.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Hershey (HSY) 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.

Valeant one big injection

Valeant Pharmaceuticals (VRX) is a developer and marketer of a range of generic pharmaceuticals and medical devices like contact lenses. You may not have heard of VRX but its major division is Bausch & Lomb the eye care company. Instead of focusing on blockbuster drugs that might cure cancer VRX has focused on dermatology (skin care such as curing acne) and ophthalmology (diseases of the eye). While not as exciting as curing cancer VRX's focus on health care products means it competes in less competitive but growing markets.

Pharmacy is hard consumer brands are better
Pharmacy is tough companies spend millions of dollars to develop drugs that have protection for around 20 years before low cost generic competitors enter the market and eliminate profits. This risk is known as the patent cliff where revenues from protected products can drop dramatically when protection runs out. Research and development spend to produce these drugs tends to be high risk but low reward with only 4% of compounds becoming approved medications, it has been estimated that R&D investments produce around 4.8% ROI.

Source: Valeant Pharmaceuticals

Make or buy decision
Instead VRX conducts targeted research and development. The CEO believes that R&D is generally a waste of money. It is better to make small bolt on acquisitions with successful medications that can benefit from VRX's distribution and sales team. VRX chooses to buy products instead of investing in creating them. VRX assigns no value to the acquisition pipeline and tends to pay cash. VRX is not a roll up story that is reliant on issuing expensive acquisitions reliant on an expensive share price. The Allergan acquisition below is an exception due to the size.

One big injection (botox)
Bausch + Lomb was a major acquisition in 2013 this year producing organic growth of 12%, 8 of VRX's top 20 products are Bausch + Lomb products. This acquisition is serving as a model for what VRX hopes to achieve with Allergan. VRX has decided to bid for Allergan the maker of Botox. VRX is offering US$58 per share and 0.83 VRX shares for Allergan. Its a big bite for VRX but they believe they can drastically cut costs at Allergan. They also share similar consumer type products which are out of pocket expenses not reliant on government reimbursements Botox is also more of a consumer durable than a pharma product. Once again the opportunity for VRX is to reduce costs as the average pharma spends 19% on research and develop versus VRX 3% below.

Source: Valeant Pharmaceuticals

Cash is fact profit is an opinion
VRX financials are messy. It is a company that has done 100 acquisitions over the past 5 years. There are a lot of restructuring charges, acquisition accounting and amortization of intangible patents but importantly free cash flow has been strong. As anyone with a business knows cash is king. You can actually do things with cash in the bank but accounting profits are just a number on a page.

Source: Valeant Pharmaceuticals

VRX has become a battleground stock with those who love the cost cutting model and those that hate the low research and development spend. The stock trades at a 12x multiple with the opportunity to take on another great consumer brand like Botox alongside with Bausch and Lomb. Its a stock that eventually could trade on a more durable consumer product multiple than that of a pharmaceutical stock. With Bausch and Lomb eye drops it is a company to keep an eye on.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Valeant (VRX) 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.

Vipshop an alternative to Alibaba

Vipshop (VIPS) is China's leading online discount retailer providing deep discounts on branded products. VIPS does not compete directly with the Chinese internet giant Alibaba but sits inbetween two of their websites. Alibaba's Taobao specialises in cheap but generic to lower end brands while TMall offers products direct from retail brands. VIPS takes the middle road offering high quality brands at discounted prices to its 9.3 million active customers.

Chinese ecommerce market the largest in the world

Chinese ecommerce is one of the fastest growing markets in the world. It has grown so fast that China is now the largest ecommerce market in the world (see chart above). This is amazing given that China only has 45% internet penetration versus the US at 80%. China's online market is growing rapidly with discount and flash sales growing faster. At 10am every day VIPS launches events across its four regional websites each event lasts for 3-5 days with several hundred products.

Buy now or cry later
Their business model of discounted limited time sales is addictive to mobile users who can check products on the go. Customers have to buy then or cry later they won't get a second chance purchase. In July mobile accounted for 52% of total sales. According to JP Morgan VIPS accounted for 8% of the Chinese discount market. In comparison TJ Maxx and Ross Stores have over 38% discount market share. China's retail market is still underdeveloped it does not have the offline discount retail stores like TJ Maxx or DFO here in Australia. VIPS benefits from this growing but competitive market by providing an online inventory clearance channel for brands.

VIPS is a growth stock constrained by warehouse capacity. They currently have total warehouse capacity of 540,000 square meters and are on track to meet their goal of reaching 700,000 square meters by the end of 2016. VIPS has recently made an acquisition in the cosmetics space with ambitions to move into other categories not just apparel. With all the excitement around the upcoming Alibaba IPO investors would do well to consider its discount rival VIPS.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Vipshop (VIPS) 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.

Booking.yeah

The Priceline Group (PCLN) is the world leader in online accommodation bookings. Their reservation sites include Booking.com, Priceline.com, Agoda.com and Kayak.com. Their most profitable site is booking.com which has around 10% penetration of the European booking market.

Europe not just great for holidays
Europe is great for the hotel business for a number of reasons, its a big holiday destination and Europeans tend to take more holidays on average 6.9 weeks a year versus the US at 3.9 weeks. The most attractive feature of Europe for PCLN is the large number of independent hotels. Independent hotels have the majority of marketshare (around 70%) this compares to the US where chain hotels like Hilton and the Marriott have the majority of market share. This makes booking.com more important to the boutique hotels as they are much more reliant on booking.com to generate traffic from overseas customers. Many of these hotels do not have the resources to market online and to distribute in foreign countries and languages. Booking.com also has some great ideas for hotel bookings (see below.)

http://www.thebookingtruth.com/reviews/bookings-best-resorts/four-seasons-hotel-limasson-cyprus-2/

Booking.com has 525,000 properties worldwide including 190,000 vacation rentals. The number of properties still has room to grow as Trip Advisor has reviews on 850,000+ hotels, B&B's and 630,000+ vacation rentals. The PCLN group will also benefit from increasing internet adoption in Latin America and the Asia Pacific. PCLN owns 10% of CTRIP China's leading online travel agency.

Google's largest customer
PCLN spent $1.8 billion in online advertising last year. Analysts have estimated that the majority of this spend went to Google. PCLN is one of their largest customers at around 3% of the search company's ad revenue. PCLN also recently announced the acquisition of Opentable increasing the group's opportunity to grow from hotels to restaurant reservations as well. With online travel bookings continuing to increase at Decisive we're checked in with PCLN.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a position in Priceline (PCLN) 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.

Electronic Arts one finger gaming

Electronic Arts (EA) is well known as the developer and publisher of EA sports titles and franchises such as Battlefield, SimCity, Need for Speed, Titanfall and Star Wars (see titles below). In its last quarter EA had 130 million active users or 2.4 billion hours of games played across console, mobile and PC devices. EA has traditionally had a terrible track record of releasing games that were not ready just to get in ahead of Christmas. Now there here is some hope for EA with a new console cycle, the ability to sell more digital products and a new CEO who is an Aussie. There is plenty of upside for Andrew the CEO as EA was voted the worst company in America for two years in a row 2012 and 2013.

Largest customer now Apple
Digital is a massive opportunity for game developers like EA. EA can now sell games direct bypassing retailers and physical packaging costs. They are also able to monetise some of their older brands on mobile like the Simpsons and Simcity. The mobile opportunity has grown so fast that Apple is now the Company’s largest retailer.


Digital sales will be bigger than retail
The older consoles had limited storage space for downloads but the new generation consoles have larger storage capacity. While downloads can take a while they have engineered the download so that gamers can play the early parts of the game while the rest downloads in the background. Approximately 10-15% of game sales are downloaded digitally. This is great for business as while the retail margin tends to go to the console developers game companies save 5-10% on packaging costs. They also gain 10-20% savings from no sales reserves which are estimates for price declines over time, basically no reserves are needed to discount excess packaged games.

The console market is doing better than expected. As of March Sony announced they had shipped 6 million PS4 units they originally estimated 5 million. Expectations were that gamers would move away from consoles but the combined number of Microsoft and Sony units are greater now than at a similar point in the last cycle. EA expects sales of games for new consoles will offset the decline in older generation consoles by Christmas this year.

One finger gaming
Mobile is an opportunity but it is different. Mobile games tend to played in bursts of less than four minutes and as we all know tend to played with one finger swipes. The good news for EA is they can leverage their portfolio of brands to get their games through the clutter of thousands of free games.The best example being EA's The Simpsons Tapped Out game. Their freemium business model with games downloaded free are subsidised by in game payments and advertising. This is their fastest growing division. The mobile game market is becoming similar to the PC or console market where a few key games and companies dominate the industry.

From 2016 onwards EA will benefit from the Star Wars license from Disney with new games coincided to be released around the new Star Wars movie. The Company has also announced a partnership with Tencent to launch FIFA Online to the China market. With a new CEO and the digital opportunity EA is back in the game.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Electronic Art (EA) 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.

Chipotle Mexican Grill the McDonalds of the new generation

Chipotle Mexican Grill (CMG) is the fast casual dining pioneer. It was started with the idea that food served fast did not have to be a typical fast food experience. CMG is the McDonalds of the teen generation. While other retailers are complaining about the weather CMG reported double digit same store sales increases. CMG is benefiting from the move to fast healthy food with the quality expected of full service restaurants but with the speed and convenience of fast food and with no tips! 

Food with integrity?

CMG was founded by a chef named Steve Ells. His initial idea was to open his own restaurant but to fund it he decided to open a little Burrito store which then took off as Chipotle Mexican Grill. CMG is focused on using the freshest food that is also grown and raised sustain-ably with respect for the animals, land and farmers. In 2000 CMG realised they could charge more for better quality food and increase sales. When they started serving naturally raised pork in 2000 they had to raise prices by a dollar but sales increased as it turned out people like to feel good by buying responsibly raised food. This lead to serving 100% naturally raised chicken and beef.

                                                    A common site at a CMG store


McDonalds & the Burrito

McDonalds was an early backer investing in CMG when it was a 14 store chain. By 2002 MCD owned more than 90% of CMG shares. McDonalds divested the last of its stake in 2006 in the IPO. While they made a lot of money with the IPO CMG's current price is $675 versus the IPO price of $22 McDonalds left more than ten billion on the table. It was a great investment by McDonalds and in hindsight was amazing they did so well together with a totally different approach to food, sustainability and attitudes toward their workforce. While CMG average starting wage is not much higher than minimum wage their managers also known as restaurateurs can make 6 figure salaries.

The McDonalds of the teen generation
While CMG has been successful they still only have 1,637 restaurants and plan to open 180-195 new restaurants this year. The growth opportunity still has a ways to go with a target of 4,000 stores in the US with CMG likely having double digit store openings for the next decade. The cash on cash returns for new stores are amazing at 72% which compares to the industry averages of 25%-35%.

Breakfast and drive through are future opportunities. CMG stores open up between 10-11am suggesting that there is future potential to serve their products in the morning. CMG have recently rolled out catering for 20+ people it is currently 1% of sales, and mostly incremental with an average order of nearly $300.

Concept optionality

ShopHouse and Pizzeria Locale are some of CMG growth options. There are six ShopHouse restaurants (SouthEast Asian concept) and one Pizzeria Locale all tied together by the concept of fast casual with a food culture of sustainability. CMG itself is still an international growth opportunity opening a third restaurant in Paris with 10 restaurants in Europe. CMG have not disclosed sales volumes of the ShopHouse and Pizzeria Locale but they have said that they are behaving similarly in general to when CMG was unknown back in early 2000. 

The hottest report so far

CMG recently announced same store sales of 17.3% a ridiculously good number. This was CMG second highest sales comp as a public company second only to their first quarter as a public company in 2006. To put it into context back then CMG had 500 restaurants compared to the 1,700 today the annualised increase is nearly the total of CMG sales in 2005. They increased prices by an average of 6.25% and saw no real resistance to the increase. Prices have not increased since 2011 three years ago.

CMG is the leader in fast casual dining and is benefiting from the trend towards healthy eating. The only problem is the price, the multiple on the stock has priced in some of these near term opportunities. Much like CMG lines we will wait in line and hope we will get served up a better price.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Chipotle Mexican Grill (CMG) 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.

Google two verbs for the price of one

If you need to know something you Google it, if you want to search for a video you Youtube it. It is no surprise that becoming a verb has helped these two websites become the world's largest and second largest search engines. Fortunately for Google (GOOG) they own both these verbs with the purchase of Youtube for $1.65 billion in 2006.

Still growing faster than the industry
Last week GOOG reported sales growth of 22% outpacing internet advertising market growth of 16% according to Zenith Optimedia. Search, video and social advertising continue to take market share from traditional banner displays helping explain the good performance of GOOG/Youtube and Facebook versus declining revenue at Yahoo. GOOG is expected to take in $53 billion of revenue this year a large number but in the context of a larger market opportunity. According to eMarketer digital ad spend will be $140 billion this year out of a $545 billion global advertising market. This digital opportunity should increase over time as mobile and internet usage increase at the expense of print and TV see below.

Google it

We are expecting growth to pick up for GOOG as it rolls out more mobile advertising including app indexing. GOOG is now able to search across apps so links to apps can appear in search results. Advertisers can find new customers by reaching out to those who have already installed apps from similar categories ie the maker of Candy Crush may want to reach users who have installed apps like Angry Birds. Advertisers can also link parts of their app directly to the ad ie wotif could take you directly to their app to book a hotel deal if you click their ad.

Youtube it

Youtube has more than 1 billion unique users per month with 40% of traffic from mobile devices. According to Youtube over 6 billion hours of videos are watched each month nearly an hour for every person on the planet! We are bullish Youtube as it is beginning to be run like a traditional TV network to attract the big advertisers. Using similar metrics to traditional advertising Youtube is including third party measurement from Comscore and guaranteeing views for the top 5% of content. This is important to brands as they only want to be associated with quality material not cats playing around with balls of string. We are also bullish on GOOG inserting app install ads on Youtube similar to Facebook where users can download the app when the ad is clicked. This is a big opportunity as Youtube keeps 45% of all advertising revenue on its site.

Here are the top five most popular videos on Youtube ever, you should be able to guess no.1.

GOOG seems to be creating a flywheel effect with Google Play and Youtube where users can access free content on Youtube while also being able to watch purchases from Google Play. GOOG is betting on free viewing subsidised by advertising (75% of Youtube ads are skippable) and pay as you go subscription content on Google Play. Apparently only 10% of people always skip Youtube ads. 

Play it?
GOOG's fastest growing division was other which is Google Play. In the March quarter Apple's iTunes/software division recorded $4.6 billion in revenue this compares to Google's $1.6 billion in the June quarter. Android users are now larger than Apple as they continue to increase Google Play sales should eventually overcome iTunes sales giving it a chance to become GOOG's third verb.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a position in 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.