Sunday, October 10, 2010

9 October, 2010 Coffee, Nina, Me and My Barron’s


9 October, 2010 Coffee, Nina, Me and My Barron’s

Ok before about six of you call to ask my wife who Nina is, she is the waitress that serves copious amounts of coffee to me and my golf buddies on the weekend. I was early today and had the pleasure of almost making it cover to cover on this week’s issue. (Except for the special section on mutual funds.)

The first thing I wanted to check out was the CBOE Equity Put-Call ratio for the week. As a quick reminder, this ratio measures the sentiment in the market place by tracking the general direction of option trades. It compares put options and call options. A put option is the right but not the obligation to sell a named stock to a specified seller at a future price at a future date. Obviously a person buying a put option is hoping the price on that stock is going to go down. Now a person buying a call option (the right but not the obligation to buy a certain stock at a future price at a future date) is hoping the price is going to go up. The CBOE equity put-call ratio only measures equity options and not ETF and indexes so it is a fairly clean measurement of how the option players are thinking the market is going to go.

I know you are skipping ahead looking for today’s picture, but come on hang in there one more paragraph and it might be helpful.

This week’s ratio is 61/100 compared to 57/100. It is a put-call ratio or p/c. Now here is a little secret. Option traders are wrong about 89% of the time. There are a lot of reasons for this and they make a lot of sense and most of the reason boil down to risk management strategies, just trust me the error rate for option is very close to 90%. So if the put call ratio went from 57/100 to 61/100, meaning option traders well selling more puts than buying more calls, they are betting that the market is going down. If those in the know think the market is going down and they are wrong 90% of the time, and increase in the CBOE equity put-call ratio is a bullish indicator.

This week in Barron’s

It was hard to get a feel for the sentiment in the articles this week. It seemed like the jobs report had the writers a bit confused as to whether we will have volume and direction in the market. Now it seems that after telling everyone to be nimble and cautious for the Labor Department report, now they are saying wait until the Fed’s statement on Nov 3.

The Oracle of Orange County I Am Not

Since there were no aha moments in this weeks Barron’s, we’ll go ahead and start chipping away at some of the questions we have had over the last couple of days. PLEASE keep in mind, I am only regurgitating what I have researched and my humble opinions and have absolutely no right to give investment advice as I am just fluffy casino money in this crazy market. (That was a disclaimer if you did not get it.)

We had one reader ask about the hotel industry, specifically MAR and CHH.

Just starting the research on Marriott sent a shiver down my spine. I used to travel a lot in a former life and I always stayed at Courtyard. I did that because they we clean, safe and each one were laid out identical to each other. I could wake up in the middle of the night and stumble to the loo regardless of what city I was in. The bad news was when I would wake up and stumble around in the dark; I would have to look outside to see what city I was in. But I digress.

Let’s look at MAR Marriott International, Inc., a hospitality company, operates and franchises hotels and related lodging facilities worldwide. It develops, operates, and franchises hotels and corporate housing properties under 14 brand names. The company also develops, operates, markets, and sells timeshare interval, fractional ownership, and residential properties under four brand names. In addition, it provides services to home/condominium owner associations for projects associated with its brands. As of January 2, 2009, the company operated or franchised 3,178 lodging properties with 560,681 rooms, and provided 2,332 furnished corporate housing rental units. It has a collaboration agreement with Nickelodeon to provide family entertainment programs to various JW Marriott, Marriott, and Renaissance resorts in the United States and internationally. Marriott International, Inc. founded in 1971 and is based in Bethesda, Maryland.

From the looks of their fundamentals, it looks like they are making a comeback to strong profitability. Their long term debt remains above 2 billion, but they are a capital intensive company. In looking at the latest 10Q filing you can see how they are leaning more towards leases on their properties and less on ownership. This will free up a lot of cash. They are using their free cash flow (about a 4 % throw off of cash if my math is correct) to clean up some of the Courtyard properties and buff up the Ritz Brand.

After doing the homework, here are some thoughts. Travel is recovering be it slowly. Companies have a lot of cash, but they are still watching their show and travel expense until they feel more comfortable with the economic future. The Obama administration got the message about blackballing 6 major convention cities by placing them on a NO GO list after the AIG junket in Southern California. (That is the one that bankrupted the St Regis.) He insisted that government agencies and companies accepting TARP fund were not allowed to use funds to visit Las Vegas, Orlando, Chicago, NYC, San Francisco, and Miami. Needless to say that restriction has been lifted. As more confidence enters the market and big companies knows how much the health care reform is going to coat (a big question mark for MAR with 137,000 employees.) we see business and leisure travel picking up.

MAR has invested in technology and is not one upped by on line travel sites like Expedia or Orvits as they used to be. MAR is on a global expansion though license contract rather out right ownership, a good move. On the downside, they do have an old brand that needs some oomph. The CEO Marriott Junior is 78 years old and according to all information I could find there is no published succession plan. In a study by Smith Travel Research, they indicated that the industry key statistic RevPAR (Revenue per Available Room) is going to be up 6-8% in 2011. That seems to be a healthy number as far as I could see. Unfortunately it looks like that is already priced into the price of the stock because they have a forward looking P/E of 26.

I can’t say I am excited about the stock. They got some good stuff working and the multiple might be justified, BUT I’d sit it out another quarter. Or if you really like the play, you might look at the January 21, 2011 35 dollar option for the 3 dollar range. That would put you in the money at 38 and change.

CHH Choice Hotels International, Inc. and subsidiaries operate as a hotel franchisor worldwide. The company franchises lodging properties under the brand names of Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel, Cambria Suites, and Ascend Collection. As of December 31, 2009, it operated 6,021 open hotels representing 487,410 rooms; and 843 hotels representing 66,585 rooms under construction, awaiting conversion, or approved for development in 49 states, the District of Columbia; and 40 countries and other territories. It was formerly known as Choice Hotels Franchising, Inc. and changed its name to Choice Hotels International, Inc. The company was founded in 1981 and is based in Silver Spring, Maryland.

Note that they are a franchisor and not an owner operator like MAR. That will impact margins capital requirements and other ratios so direct comparisons are a tad difficult. At face value, they have a 2% sustainable yield, they have little or no free cash flow, they have about 300 million if long term debt, which implies they could pay off LTD in about three years. When they do have excess cash, they are fairly aggressive in their stock buy back. (This might not happen again until 2012.) Because it is a franchisor, its franchisees are at the whim of the landing industry to open new locations or expansions. Not a good place to be for the next 12 to 18 months.

I’d have to take a pass at CHH.

Since this analysis forces us to look at the whole group, I did discover a possible play. Though it is early in its turnaround, IHG InterContinental Hotels Group PLC engages in the ownership, franchising, management, and leasing of hotels and resorts. It operates its hotels under various brands, including InterContinental Hotels & Resorts; Crowne Plaza Hotels & Resorts; Holiday Inn Hotels & Resorts, including Holiday Inn Club Vacations; Holiday Inn Express; Staybridge Suites; Candlewood Suites; and Hotel Indigo. As of December 31, 2009, the company had 4,438 franchised, managed, owned, and leased hotels with 646,679 guest rooms in approximately 100 countries and territories worldwide. InterContinental Hotels Group was founded in 1967 and is headquartered in Denham, the United Kingdom.

We like the fact that they are cheap at a forward looking P\E of 14. They are managing their debt and dumping some real estate and focusing on the hotel management. Their dividend yield is 2.3% which is not too exciting until you stop and think that the US 10 year treasury is at 2.36%. Mmmm. Their margins are nice. The ROE is huge. IF they build out a bit more internationally (a good start in central and South America) and invest in their IT infrastructure to get back loyal customers from shopping on Expedia.

The reader also had a question about WYN Wyndham Worldwide Corporation, together with its subsidiaries, provides various hospitality products and services to individual consumers and business customers in the United States and internationally. It offers its products and services under the Wyndham Hotels and Resorts, Ramada, Days Inn, Super 8, Wyndham Rewards, Wingate by Wyndham, Microtel, RCI, The Registry Collection, Endless Vacation Rentals, Landal GreenParks, Cottages4You, Novasol, Wyndham Vacation Resorts, and WorldMark by Wyndham brand names. The company's Lodging segment franchises hotels in the upscale, midscale, economy, and extended stay segments of the lodging industry, as well as provides hotel management services for full-service hotels. It’s Vacation Exchange and Rentals segment provides vacation exchange products and services to owners of intervals of vacation ownership interests (VOI); and markets vacation rental properties primarily on behalf of independent owners. Wyndham Worldwide Corporation's Vacation Ownership segment develops, markets, and sells VOIs to individual consumers, provides consumer financing in connection with the sale of VOIs, and provides property management services at resorts. The company is headquartered in Parsippany, New Jersey.

This is an interesting play and the best of the three as far as I am concerned. MAR has a much stronger brand presence, but fundamentally WYN look nice. It has a nice margin and manageable debt. Its upside is the best of the three and one of the better in the group.

All in all this is not an exciting segment but if I was putting money to work here I have to bet on WYN for the next 12-18 months IHG for the next 18-24 months. Beyond that MAR is probably a better bet because they have about 80,000 new rooms coming on line.

Here is a sleeper worth doing a lot more homework, but if you think the exploding middle class in China are going to start being intra-county tourists check out HMIN Home Inns & Hotels Management Inc. engages in the development, lease, operation, franchise, and management of a chain of economy hotels in the People's Republic of China. The company operates its hotels under the Home Inn brand name. As of June 30, 2010, it operated 674 hotels in 126 cities in China, of which 390 were leased-and-operated hotels, and 284 were franchised-and-managed hotels. The company was incorporated in 2001 and is headquartered in Shanghai, the People's Republic of China. This is a strong recommendation from IBD and Vector Vest.

It is important to note that CHH is in a Negative Equity position. As a shareholder you want to see shareholders value (equity) improved. Remember it is called a balance sheet because assets will always equal liabilities plus equity. At the end of 2009 CHH had total assets of 340 million. They had 454 million in total liabilities. That means they had a minus 114 in shareholders equity.

Hope that helped keep the light on for ya.

Put ‘em up Put ‘em Up, I Dare Ya

I owe you a lot more answers on the topics I mentioned on Friday, but the Hotel exercise (which I enjoyed) was quite extensive. I will get to the rest of the list this week.

A Look In The Rear View Mirror

One Year ago this week, someone asked about the Property and Casualty Insurance Company XL. Here was our reply:

“XL up or down?

You don't specify over what time period so if your looking for the next 3 mos, I'd say slightly up to maybe 19.50. The fundamentals don't support that as their earnings are flat, revenues are flat, debt is huge, but there is a heavy Put to call ratio that could short squeeze it up a few points.

If you are in, and up I'd take the money and run. If not stay away.”

The Stock was selling for 18 when we wrote this. By March 18th, 2010 the stock made its way to $19.36. That was its resistance point and then it came back down again to 15.97, a better entry point. The stock is now selling at $22.00. Any money in that investment could have been deployed elsewhere with much better returns.

A Look Into The Crystal Ball

First off let’s do the Earnings Challenge this week.

As this is the beginning of earnings season, there are lots to choose from except for Monday which has a closed bond market so it’s a bit quiet. Rail and Intermodal Giant CSX is reporting Tuesday and should beat the $1.04 a share estimate. I am thinking 1.07. JPM, JP Morgan reports Wednesday and we are thinking a slight miss. The guess on the street is 88; let’s call it 86 cents a share. Apollo Group, the private education company will have a big miss as they try and make their way through the turmoil of the private sector education legal woes. The estimate is 1.29 and we are thinking $1.20. Google reports on Thursday and they are looking for 6.67 a share in earnings. We don’t think so. I am guessing and I have note read it ANYWHERE, but their release of the smart phone in March was a flop and I know they got a slew of returns because of some misinformation at Google and several carriers. (Verizon being one of them.) I have to believe there were some sizable costs to that misstep. Look for 6.42 in earnings and the stock taking a hit, (Which could create a nice buying opportunity.) AMD, Advanced Micro Devices report on Thursday and except for Arm Holdings in the UK, this sector is feeling a bit of a pinch. We thinkest this is built into the estimate of 6 cents so they should hit. Look for Grainger to beat big time. That will be a good tell for industrials and infrastructure plays like Deere and CAT. GWW is supposed to see 1.81 a share. We are going to go way out on a limb here and say pretty darn close to two, say 1.94 and a nice pop on the stock. BECAREFUL as this stock is up 40% on the year and at or above almost all of the target prices @123 a share. If they do not beat, and even if they meet the 1.81, look for a sizable pull back. This stock is trading at 16% above its 200 day averages. Be nimble. Friday and here is your contest name we have bell weather General Electric. We will do the same thing this week. Get your guesses to me by Thursday evening and the first closet on in will get a Jim Cramer Book. Good Luck!

As far as next weeks economic calendar. Monday is quiet. We have a couple of retail sales reports coming out and they should a little disappointing, but not too disruptive. Wednesday we have the International Trade report and we should see a further drop even below the -44.3 billion estimate. I could broach a minus 45 billion. We will also have the PPI on Wednesday and the Producer’s Price index is supposed to be .1% up. I say that the devalued dollar will drive it up further than expected. Look for a PPI of .3% which annualized would be 3.6%. Friday we will have the CPI and the month to month is expected to be at .2% and I can get that, but look for next months to go up just a notch.

My guess is the general rally will continue this coming week, by less than 1%.

Fixing the Financial Crisis. 

When President Obama learned of the need for more quatitative easing and additional cash in the market place he took immediate action.He made sure the presses were ready to run!
Salve Lucrum


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