Thursday, September 16, 2010

16 September 2010 You Figure It Out


16 September 2010  You Figure It Out

Some nights I know what I want to call the posting. Tonight there is so much stuff, I did not know what to call it.

I am writing this from Utah as this will be my last weekend to try and get some lake fishing done. So let’s get started.

I know a few of you own Boeing BA and you might be wonderng about the press release today about the bad Rolls Royce Engine and how it might impact the 787 dreamliner. Quite honeslty, I was wondering as well. We have a few shares. Fortutnatley Mr. Cramer and his team at did a e-mail blast to Real Money subscriber giving his read on the situation. Before I plagerize the crap out of the article, I strongly suggest if you have a portfolio worth more than 10-20 grand you might consider subscribing, I say this not because of the stocks he is talking about, but about his thinking and logic. The guy is crazy like a fox. After reading his piece about BA, I am more worried about one of my friends holdings in RR Rolls Royce which we trade on the LSE (London Stock Exchange). Cramer points out that this is not the first pro0blem with these engines and is part of the natural course of product development. In a nutshell, this is not a big deal and if you own the stock picking some on the bad news today would not have been a bad idea.

Sunday night we took a stab at FDXs earnings and guessed we’d see a beat of the $1.20 a share estimate. Well we were wrong and they came in at $1.20. The CEO had some neutral forward looking comments which did not bode well for the stock. If you have been watching Mad Money, Cramer is letting us know that with this lack of momentum in the market CEO are cautionary even if they have a good story to tell. We feel this is the case with FedEx.

I had a great day today in general as we had some good meetings this week, and I have been swimming everyday, but I had a great night with the wife last night at Hanna’s. I only mention this because this is why we do the homework and try and figure out this crazy thing called the market. It is so we can enjoy the rewards of our labors. Last night we enjoyed a 2004 Torre Muga Reserva which is 75% Tempranillo, 15% Mazuelo, and 10% Graciano. It really is a sexy pour. Inky purple in the glass and quite viscous. Because they park it in French oak barrels for a year and a half it has a woody smell to it, but its not a real tannic smell. It is a very earthy spicy glass of wine with very subtle fruit structure and if you can get a hold of it, we highly recommend it.  But I really digressed that time.

Gold fever

So why is gold hitting almost daily highs? A lot of the reasons have been telegraphed, but thanks to a great piece by Constantin Boltz and Dominic Schnider of UBS fame (Thanks Tim) and my weekly gold update from Monex (Thanks Dana) let me fill in the blanks. Here is a shopping list of reason you want to hang onto your gold and possible add to your position at least till the end of this month. Chinas continuing demand, recent inflation spikes in the US and the UK, still troubling debt problems in the Eurozone, international banking capitalization issues, India’s recent purchase of 20 thousand pounds of gold, on top of the traditional holiday gold demand for gold based jewelry all over the world, China allowing four key banks to purchase gold on the open markets to stabilize their capital holdings, and all of this has happened with very little participation by the general public. That makes those in the know to talk about 1500 and ounce gold. Be careful in October as it is a traditional retrenchment month for the asset. (And September is a really and month to be in the stock market?)

So you want to box that up?

If you are reading the forward looking statements by UPS and FDX and Amazon, you can see some linkage right before your eyes. The comments are cautious but growing. Even in our comments tongith about William Sonoma and their internet efforts. When you order something on line of course these things have to somehow get to your home. By Wednesay of this week both of my huge recycle bins were completely full. We have the luxury of ordering some back up school text books and 6 of them showed up this week from Amazon. That along with our other stiff made me realize if FedEx and UPS is shipping this stuff the box makers must be selling boxes. That lead me to keep my eye out for good intel and once again my buddy Tim at UBS came through. In one of their market update pieces, there were some impressive industry states for the paper cardboard market. We will be looking at the sector ehich includes International Paper IP, Temple Inland TIN, UPM UPMKY, Kimberly Clark KCDMY, and Meadwestvaco MWV to name a few. Cardboard and paper demand is up about 55 from last year. This could be a good cyclcial play for the next 12-24 months once we find a good play. Please beat me to the punch and let me know if you found a good one.

So who is not on the doll?

There was a phenomenal article in the Journal yesterday by Sara Murray. I encourage you to get a hold of it. It is called “The Obstacales to Deficit Cost Cutting.” I sent her a note today thanking her and congratulating her for great research and great journalism.

It points out the fact that almost half of US household are receiving some type of government aid. This is at an all time high. This is occurring at the asme time that almost half of the households are not paying federal income tax.

Of those not paying income tax, about half do not earn enough to pay income tax and the other half have fixed income investments in tax free investments or enjoy tax credits (I’d like to know what they are). Now after reading this article, we would fall into the category of getting government help because we received a tax credit for installing an solar panel system in our house.

This all shakes out to opinion polls that have half of the US concerned about the 1.2 trillion dollar deficit and have of the people in the US supporting more stimulus programs and extension of unemployment support.

Ms. Murray gives a great history lesson going back to the thirties explaining some of the entitlement programs beginnings and how many have outlived their original purpose yet they survive today. I tell you this article should be considered for Pulitzer consideration. Please get a hold of it and give a good read.

Right On Target With William Sonoma

An article today reminded me I owe you a couple of retail plays that we have on our watch closely list. As mentioned, cash wise we are not in a position to make a significant play, but doing the homework won’t hurt.

WSM William Sonoma operates as a specialty retailer of home products. It offers culinary and serving equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware, table linens, specialty foods, and cooking ingredients; and bridal and gift items under the Williams-Sonoma brand name. The company also provides home furnishing categories, including furniture, textiles, decorative accessories, lighting, and tabletop items under West Elm brand; bed and bath products under Pottery Barn brand; and children's furnishings and accessories under Pottery Barn Kids brand name. Williams-Sonoma, Inc. sells its home products through five retail store concepts, which include Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, and Williams-Sonoma Home; seven direct-mail catalogs that comprise Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm, and Williams-Sonoma Home; and six e-commerce Websites, which consist of,,,,, and As of January 31, 2010, it operated 610 retail stores, including 259 Williams-Sonoma, 199 Pottery Barn, 87 Pottery Barn Kids, 36 West Elm, 11 Williams-Sonoma Home, and 18 Outlet stores located in 44 states of the United States; Washington, D.C.; Canada; and Puerto Rico. The company was founded in 1956 and is headquartered in San Francisco, California.

The 3.2 billion dollar market cap (the total value of all the outstanding shares times the current market price.) has a 2% dividend yield and a forward looking P/E ratio (I usually talk about forward looking P/E ratios so unless otherwise noted it will be forward looking.) of 15.5 as of tonight. Free cash flow, be it very cyclical ranging from 20 mil to 300 mil seems to be bouncing in the right direction. They are using the FCF to manage debt, running roughly at half of current net income. In other words they can pay off long term debt in six months of income. They recently announced a stock buy back worth 65 million dollars which equates to about 2.1 million shares or about 2% of their outstanding shares. So how do we as lowly fluffy casino monkeys determine what that might mean in a future equity value. Here is a very very simplistic view. The P/E of 15.53 is based upon the future earnings per share (2011) of 1.93 a share. You can do the math or trust to be accurate. If you take 2% of the shares off the street via this buy back, that 1.93 a share is distributed across 2.1 million less shares. At the end of the day, it is less than a penny a share more, but it makes the stock a bit cheaper.

Also keep in mind the market pays for growth and last quarter they reported sales up 15% from last year (admittedly not a great year). One of their strong points is they are leveraging the internet better than most in that category. We use and enjoy the internet interface. (great place to get your Reidell stem wear folks.) Management is talking positively about the future when many are not. That might have more to do with CEO not wanting to disappoint rather than actual fundamentals. When you think of their marketing reach, very few companies do as well with brick and mortar, internet, and catalog selling. Can you think of any? Their internet business is approaching almost 30 percent of revenues and their margins on these items are very impressive. In doing the homework on a company o was very familiar with turned up a nice surprise. I had not heard of the West Elm brand. It is really cool stuff. It is for a younger affluent market, but cool none the less. It’s kinda like Ikea stuff without the buyers remorse. (I know I just pissed off about 6 Ikea owners.) Rumor has it that West Elm is blowing away Pottery Barns in all of the 37 markets they compete. (That is called market cannibalization as WSM owns both brands) We all know brides love the WSM registry and it still is a major driver for the company. Leases for about 150 stores will come due over the next couple of years and in this real estate climate they should be able to negotiate really sexy leases improving their operation profits.

But into every one’s life some rain will fall. WSM does not have a lot of stuff on the shelf made in Ohio or New Mexico. Asian imports are creeping up in price and this will erode margins a bit, as consumer price elasticity is not what it was in the good old days of 2008. (I actually wrote that. Scared myself. I did steal the content from Morningstar, but it was my wordsmithing, wow!) What the Asian market don’t increase because of wage demands, commodity prices (silver, gold, Plat) are all headed north also squeezing the margins at WSM.

Price targets on the stock are about 10% above current levels. It seems like a nice safe well managed brand with about 10% on the upside in 12-18 months. This is a decent conservative play. Do your homework.

Now its not fair for me to comment on the next retail stock because I have insider information. Target Corporation operates general merchandise and food discount stores in the United States. The company offers household essentials; hardlines, including electronics, music, computer software, and toys; apparel and accessories, jewelry, and shoes; home furnishings and decor consisting of furniture, lighting, and kitchenware, as well as seasonal merchandise; and food and pet supplies primarily under Target and SuperTarget trademarks. It also sells its merchandise under private-label brands, including Archer Farms, Archer Farms Simply Balanced, Boots & Barkley, Choxie, Circo, Durabuilt, Embark, Gilligan & O'Malley, itso, Kaori, Market Pantry, Merona, Play Wonder, Room Essentials, Smith & Hawken, Sutton and Dodge, Target Home, Vroom, up & up, Wine Cube, and Xhilaration. The company also offers merchandise through programs, such as ClearRx, GO International, Great Save, and Home Design Event. In addition, it markets its merchandise under licensed and designer brands comprising C9 by Champion, Chefmate, Cherokee, Converse One Star, Eddie Bauer, Fieldcrest, Genuine Kids by Osh Kosh, Kitchen Essentials by Calphalon, Liz Lange for Target, Michael Graves Design, Mossimo, Nick & Nora, Sean Conway, Simply Shabby Chic, Sonia Kashuk, and Thomas O'Brien. Target Corporation also operates in-store amenities, such as Target Cafe, Target Clinic, Target Pharmacy, and Target Photo, as well as leased or licensed departments, including Optical, Pizza Hut, Portrait Studio, and Starbucks. The company markets its products through its network of distribution centers and third parties, as well as through its online shopping site, As of June 2, 2010, it operated 1,740 stores in 49 states and the District of Columbia. Target Corporation also provides credit to qualified guests through its branded proprietary credit cards, including the Target Visa and the Target Card. The company was founded in 1902 and is headquartered in Minneapolis, Minnesota.

My insider information is the result of my lovely wife doing diligent consumer research there constantly. (Gonna pay for that one!) This is a 38 billion market cap company. The dividend is a bit weak at 1.8%. For such a great brand it is cheap at a 12.2 multiple (P/E ratio). At face value, their debt looks high, but from previous research, they own a lot of the properties they are in. That explains and legitimizes the long term debt, but creates another problem. Many of their properties are on the books (their balance sheets) at values of 2007 ish and there has been significant value adjustments that have not been applied to the assets on the books. Keeping in mind we pay for future growth, their growth has not been great, but we know why. The economic turmoil as a result of the consumer’s lack of confidence and propensity to save along with extreme price pressure from Uncle Wally (WMT). Its in-house credit card program is successful and an interesting income sector for the company. Targets decision to expand the grocery department puts it even more directly combative with Uncle Wally at a time when we should see commodity prices headed up, possibly squeezing margins even more. While I keep mentioning WalMart as a key competitor, Amazon can not be ignored in this sector.

There has not been a down grade on this stock for more than a year. Several upgrades over the last few months have set a Target Price (no pun intended) of 62-63 a share. Even at that level the P/E ratio would only be 14.3, relatively cheap for such a recognizable brand. If I had the cash and wanted more retail exposure, TGT would be a solid play for the next 18-24 months. Do Your Homework.

From the Work In Progress White House Photo Gallery:

After a long day of brain storming, a photo of the President capturing all of the Cabinet's and Staff's really really good ideas on a white board.

Salve Lucrum


Post a Comment

<< Home