 |
 |
| Sign Up For This Free Weekly Newsletter |
| IN THIS ISSUE – July 16, 2010 | www.bullmarket.com |
|
Feature Article By NextInning.com: The Power of Emerging Economies By BullMarket.com: Member Q&A: Prospect Capital By BullMarket.com: Cold Wings -- Is Buffalo Wild Wings Cooling Down? By BullMarket.com: AECOM Purchases Tishman
|
|
The Power of Emerging Economies Possibly even more impressive is the fact that according to the data set, emerging economies represented 39.2% of total worldwide GDP in 2008. This is up from roughly 25% of worldwide GDP in 1990. Based on the research and findings I shared in the aforementioned report, I expressed two opinions. The first was that emerging economies would pull the world out of the recession. This had never happened before. As a matter of fact, we used to live by the axiom that if the West caught a cold, Asia, which is the home to many emerging economies, caught the flu. The second contention I shared was that spending preferences in emerging economies would favor technology. The reason behind this was simple; it was technology that put these economies on the map and it is technology that is giving consumers in these economies economic mobility (it empowers people). Today, substantially more than 50% of the people in the world own a cell phone (I think we'll be at about 70% by the end of 2010). This means there are billions of people connected today who twenty years ago would have probably never dreamed of talking on a telephone during their life. While I don't have the statistics for PC ownership or Internet access, I think we can assume the changes are at least as striking. What this all means at the bottom line is emerging markets are driving worldwide economic growth and the spending patterns in these emerging markets strongly favor technology - not just consumer spending patterns, but also infrastructure spending patterns in these countries. Twenty years ago, aggregate spending on tech infrastructure by the countries that have since joined what we call today "emerging economies" represented little more than a rounding error. The same could be said for consumer spending in these countries; the Chinese weren't buying handsets, flat screen TVs or PCs, they were too busy trying to find food, clothing and shelter. However, after decades of being essentially indentured servants to consumers in mature economies, emerging economies and the consumers who live there have developed critical mass. In other words, to a much greater degree than ever before, these economies are self-reliant; building both the infrastructure and consumer products they will consume internally. In China, for example, telecom and networking company Huawei passed Alcatel-Lucent (ALU) to become the third largest player in the RAN (Radio Access Network) in the world, China Mobile has grown to be by far the largest cellular operator in the world and I wouldn't doubt that there are a number of other economic and product sectors where China is a leader. Interestingly and much to my surprise, Intel (INTC) stated during its conference call that the product mix it sells into the tier one coastal cities in China is richer than the product mix it sells into New York City. That tells us spending preferences as a percentage of disposable income are much more focused on technology than they are even in the largest and one of the most affluent cities in the U.S. Maybe that explains why Wall Street simply doesn't get it, but fortunately, there are some more clear-sighted analysts who do. One of the many sources of information I keep pace with is the Linley Group. While their analysis leans strongly toward technical evaluations (it's best to wear a pocket protector when reading their research), in the specialized communications and broadband semiconductor sectors, I've found both their attention to detail and worldwide market perspective to be very helpful. I think you'll find the following comments taken from a recent Linley report supportive of the positions noted above: "Sales of semiconductors for wired-communications applications are rapidly recovering after a dramatic slowdown that began at the end of 2008 and continued into 2009. Sales of Ethernet chips and other components tied to enterprise spending are bouncing back, although the duration of the recovery depends on the health of the global economy. Sales of broadband ICs and other components will follow trends in carrier capital spending. While some carriers are in a low-investment phase of their business cycles, other carriers--particularly those in emerging markets--are investing heavily. Sales of new technologies, such as PON and 10GbE, are growing quickly as the downturn hastens the demise of the legacy technologies they are replacing. Recent consolidation among chip vendors will enable them to reduce annual price declines, further improving the revenue outlook." Bottom Line: As we roll into the earnings reports from companies that participate in the various forms of infrastructure technology next week I think we're going to hear quite a bit about success in emerging markets as well as the renewed purchasing activity we've more recently seen in mature economies. Particular areas of strength I'm expecting to hear about include data center (storage, server and networking) and broadband infrastructure (both wired and wireless with the greatest strength being wireless). We will publish our State of Tech report covering the OEM (Original Equipment Manufacturer) sector next Monday and in that, discuss a number of companies that participate in these markets. Readers should also take time to carefully review our State of Tech report covering specialty semiconductor companies. That report includes a number of companies that have very high exposure to infrastructure applications. Disclosure: At the time of this publication, out of the companies discussed herein, Paul McWilliams had a long position in INTC. In addition to these, he also had a short position in INTC January $25 calls.
Member Q&A: Prospect Capital A) As a refresher, Prospect Capital is a business development corp (BDC) that mostly invests in the debt of energy and manufacturing firms, although it does have a investments in healthcare, financial services, and retail, as well. At the end of its fiscal Q3 ended March 31st, the firm had investments in 55 portfolio companies following its acquisition of Patriot Capital. Approximately 44.1% of its portfolio is in senior secured debt, 43.6% in subordinated secured debt, and the rest spread out across other investment vehicles. The largest sectors it has investments in are oil and gas production at 14.6%, healthcare at 13.0%, gas gathering and processing at 12.6%, manufacturing at 11.7%, and food products at 8.2%. The firm's largest investment is in midstream gas gatherer and processor Gas Solutions, in which it owns 100% of the equity and secured notes. The company has had talks to sell the company the past two years, but so far has decided not to sell it. Prospect ended March with a book value of $10.09, up from $10.06 in Q2 but down from $14.19 a year ago. The drop in book value this fiscal year is due to -$1.65 in dividends, -85 cents from a secondary offering, and -90 cents in realized losses, offset by a gain of 85 cents in investment income, 10 cents in unrealized appreciation, and 14 cents from the Patriot acquisition. For its fiscal Q3, Prospect recorded net investment income of 30 cents, above Wall Street estimates of 29 cents. It recorded net income of 41 cents, helped by 11 cents in unrealized portfolio gains. Looking forward, Prospect guided for net investment income of 24-32 cents per share for fiscal Q4. Last month, the company changed to a monthly dividend from a quarterly dividend, and announced a June distribution of 10 cents, 10.025 cents for July, and 10.05 cents of August. However, that's down from the 41-cent dividend it paid in Q1. "Given the attractive environment for investment opportunities, we are adjusting our distributions to retain capital for reinvestment," CEO John F. Barry III said in a statement. "We have closed numerous transactions in the past several weeks, and we currently enjoy a pipeline of term sheets and other future potential opportunities more robust than in the past." The company also closed on a new $210 million revolving credit facility. BMR Take: When we last looked at Prospect in February, we said we thought the stock was fairly valued and that we'd cash out of positions or at least take partial profits. After a bit of a sneaky dividend decrease, which not only was cut by -10 cents but also basically eliminated two months of payouts, our view of the stock hasn't really changed, even though the stock is down about -12%. We think former Recommended List selection TICC (TICC, $8.38, 0.16) is the more attractive BDC stock at this point, and we exited it late last month.
Cold Wings -- Is Buffalo Wild Wings Cooling Down? Buffalo Wild Wings essentially sells a neighborhood sports grill & bar concept. It features Buffalo style chicken wings with 12 signature sauces, as well as burgers and other "bar" foods. The company's first restaurant was founded in 1982 at a location near The Ohio State University campus. Today, Buffalo Wild Wings operates in 42 states, with 235 company-owned locations and 439 franchised restaurants. Ohio is still the largest market it operates in, with 85 locations across the state. Texas is its second biggest market with 78 eateries. The bulk of its locations, however, are in the upper Midwest, and it sees ample expansion opportunities on the West Coast, where it only has 18 restaurants, and in the MidAtlantic region. Wings represent the largest percentage of the company's sales, with traditional wings representing 20% and boneless wings 19%. Alcohol accounts for 24% of sales, and other menu items 37%. Approximately half of sales come during dinner hours, 21% from lunch, 15% from 2-5 PM, and 14% from late night. Buffalo Wild Wings' shares were on fire to start the year, up nearly 27% year to date until it reported its Q1 results on April 27th. While earnings topped estimates, Q1 same-store sales were a little soft, and for April, the first month of Q2, comparable-store sales were downright weak. For Q1, the company earned $10.6 million, or 58 cents a share, up 12% from $9.5 million, or 47 cents a share, a year earlier. Revenue climbed 16% to $152.3 million. Analysts were looking for EPS of 57 cents on sales of $154.4 million. For the quarter, same-store sales inched up 0.1% at company-owned restaurants and 0.7% at franchised restaurants for a blended comp of about 0.5%. Analysts were looking for an increase of 1.4%. For April, comparable-restaurant sales were down -3.7% at company-owned locations and -2.4% at franchised bar & grills. Menu price increases taken over the past 12 months at company-owned restaurants were slightly over 2%. On the conference call, CEO Sally Smith said: "In further analyzing, we’ve identified that nearly all of our company-owned locations entering the comp group in the last four months are negative. These are units that opened in 2008, have trended down from their opening volumes, and are continuing negative on a year-over-year basis as they enter their 16th month of operation when they become a part of our same-store sales calculation. In addition, we have identified about a dozen restaurants that are not meeting our sales expectations. All of these locations have the focused attention of our operations and marketing teams." "Last, and of greater impact in April, is that we have experienced a decline in our alcohol sales, which we believe is a result of aggressive competition and advertising for our bar business, as competitors, both local and on a national level, are offering significant discounts for both food and alcohol. We will combat this with a renewed emphasis on our happy hour and late night time periods, and have begun promoting a new late night menu featuring six snacks priced at $3." Looking at the balance sheet, Buffalo Wild Wings ended the quarter with $66.8 million, or about $3.68 per share, in cash and no debt. Restaurant level cash flow, which is calculated before depreciation and preopening expenses, was $24.7 million, or 17.9% of restaurant sales, versus $22.1 million, or 18.5%, last year. This 60 basis point difference is mainly attributed to the higher cost of traditional wings and general liability insurance. Looking forward, Smith said: "We have previously stated that our 2010 growth goals are 13-15% unit growth and 20% net earnings growth. Although the first quarter’s performance is on track with these annual targets, the results of one quarter are not necessarily indicative of a full year’s performance. While we believe that our previously-announced net earnings growth goal for 2010 of 20% may be achievable, improvement in same-store sales and moderate wing costs are key to meeting this goal." BMR Take: While one of the fastest-growing concepts out there, Buffalo Wild Wings is in a pretty crowded space, with plenty of other bar & grill concepts to compete with, including Applebee's with about 1,850 locations, Chili's with 1,300, Ruby Tuesday's with 850, and TGI Friday's with 600, not to mention smaller regional chains and local sports bars. Competition looks like it has started to catch up with the company, as discounts have driven consumers to other options. Meanwhile, it appears after an initial boost, more recently opened restaurants haven't been able to keep their traffic. While we think Buffalo Wild Wings' plans to turnaround sales should help – including a light night bar menu and product focused advertising – trading at 16x next year's estimates, the stock isn't exactly in the bargain bin even after the April sell-off. Meanwhile, its concentration in rust belt states makes it particularly vulnerable to a choppy economy. While expansion into the West Coast and MidAtlantic markets could be promising, they are also two of the most crowded markets. One positive for the company is that wing price trends are currently working in its favor, which should help margins. All in all, we think the stock looks fairly valued, and we'd remain cautious in the near term, as we think the company taking down its full-year earnings growth target is a real possibility.
AECOM Purchases Tishman Tishman is a 112-year old firm specializing in construction management services. It also provides program management and other construction-related services to its public- and private-sector clients in a variety of markets, including arts and culture, commercial, education, gaming, health care, hospitality, residential, retail, technology and transportation. The company operates in the U.S. and in the United Arab Emirates, and generated nearly $1 billion in revenue last year. CEO Dan Tishman will continue to lead the firm's operations and will also be a vice chairman and member of AECOM's board. "This is a unique opportunity that combines two best-in-class industry leaders to form a fully integrated global platform capable of delivering the full suite of services – from project concept to completion," AECOM CEO John Dionisio said in a statement. "AECOM is joining forces with a premier construction management services firm in Tishman, which is a true leader, and a powerful brand, in the industry." BMR Take: This looks like a solid deal for AECOM that will greatly expand its footprint in the low-risk, high-margin Construction Management/Project Management (CM/PM) business. Tishman basically manages all the trades on a construction project for a fee. It is considered a very strong franchise, especially in the New York market, where it has led (or is leading) construction management on many of the city's well-known buildings. The two companies have also worked together on many projects, so it should be a good fit, and with AECOM's global scale, it should be able to expand Tishman's expertise to other markets. For more on AECOM, please see our post from yesterday.
|
Want Our Investment
|
|||||||||||||
To View Our Disclosure Policies: BullMarket.com, NextInning.com. Copyright © 2010 Indie Research LLC – All
Rights Reserved Readers are urged to consult with their own independent financial advisors
with respect to any investment. All information contained in this report
should be independently verified with the companies mentioned. Neither
Indie Research, LLC, nor its officers, directors, partners, contributors
or employees/consultants, accept any liability whatsoever for any direct
or consequential loss arising from any use of information on this website
or any use of information in its newsletters. |
||||||||||||||