Friday, January 14, 2011
Yes, but only if you know for sure what federal policymakers will do AND when. I do not so I am staying out. Also, quite simply, I do not know enough about the market (outside of a few ETFs) to feel comfortable: there is a very wide variety of issuers, underlying collateral, income tax considerations, and so on. But the policy response, basically whether we have QE3 for certain muni obligations or not, will be decisive. Despite the posturing of the newly elected majority, I simply do not see them letting a major electoral state go without money or borrow at prohibitive rates, as they should, for too long. Mass support will be easy to get: just inconveniencing people by not having their kids in school will stir the pot quickly; let alone having a major hospital shutdown. So there will probably be a bipartisan agreement of some sort, kicking the can down the road as this seems to be the only approach our elected officials use.
Of course, the tough choices will be made for them sooner or later.
Here's Obama's primetime TV statement, coming in a few months:
"Fellow Americans, I am very pleased to announce that today I signed into law a bill passed almost unanimously by Congress to solve the difficult situation that our states and cities are finding themselves in.
Like many hardworking American families, states and cities have been mislead by unscrupulous Wall Street bankers into borrowing more than they need on terms they did not understand. Through no fault of their own, our firefighters, policemen, teachers and civil servants were likely to suffer deep, devastating cuts in salaries, benefits and pensions, thus putting a dent in the fragile economic recovery and reversing the improving employment situation.
This 999-billion dollar bill is an investment in our communities that will help tide them over through the rough economic patch. The Treasury Department's investments in municipal bonds will be financed by the newly extended and very successful quantitative easing program of the Federal Reserve. It is time that we take a stand against the big bank bailouts and bonuses, and for the prosperous future of hard-working American families across this great nation of ours. Thank you."
Posted by Barbarian Capital at 20:24
Wednesday, January 12, 2011
The news on Monday was that Crumbs Bake Shop was going public via a reverse merger with a SPAC. Several other consumer businesses have gone public via SPACs, and the track record is not exactly great. JMBA, Jamba Juice, was at $12 in '06 after the merger, currently at $2.30. SMBL, Smart Balance, reached $13 in '07, and is now at $4.50. APP, American Apparel, a company I have written extensively about (be it defaults, illegal alien employment, or the CEO's "idiosyncrasies" ), was a $15 stock in early '08, and $1.50 now. May be fourth time is a charm.
I glanced through the materials, and my view is that the growth that will undoubtedly come is priced too aggressively. I have some other considerations as well.
The strong sides of the business are: good growth, excellent sales per sq ft/good store-level economics, broad appeal, NO onsite baking.
Valuation: as proposed, Crumbs is valued at 16x 2011 EBITDA vs. 11x for their sel-selected peer group (SBUX CMG PNRA JMBA RMCF CBOU BAGL etc). Setting aside the "sausage" (aka adjusted EBITDA) forecast for next year, this multiple is very aggressive. More on the EBITDA later.
Dilution/overhang: it is not just the SPAC warrants. There is a large contingent share issuance to management that will kick in 2013. Large grants like that might depress the per share value even if the underlying business is doing well.
Sales composition: this is a big one for me. 78% of the sales come from cupcakes, 12% from other baked goods, and only 9% from beverages. This is a BIG problem in three ways. One, cupcakes are trendy (some may say, past their prime). This is a risk. Two, the cost of the ingredients has been marching up (flour, sugar, oil). What is the pricing power of a cup cake? Zero. Third, only 9% of the sales are from beverages. Beverages is where the money is made in the vast majority of food service establishments, and these guys really should have a good, solid coffee program by now. They don't. I would have liked to see a more balanced sales mix. We have seen a number of consumer companies overly dependent on one product or trend crash and burn: Jamba, Crox, Heelys, Atkins, Krispy Kreme.
Average check: the company says that its $20 average check is a good thing. It might be, but it might also be too much of a good thing. It means that customers do not visit the store on a regular basis so the purchase is completely discretionary (also 2-6 pm is the biggest sales period). This is a less robust model. High average check places are more susceptible. For example, high-average check restaurants like RUTH went from $20 to $1, MRT from $20 to $2 and MSSR from $30 to $2 when things really went downhill in 08-09. Low-average check place did much better during the period, MCD gyrated around $60 and YUM went from $40 to $25 at the very bottom. There are easier, less painful ways to add beta if you need it.
Aggressive growth: this is a part of the story. The company currently has 34 stores, and targets 200 stores by 2014. Here's a little secret. Stores are not as easily scalable as iPhone apps. There are operational problems, and then there is the capital required. The company says that it costs them $300k to open a store. This is $50 mm for the 166 stores they need to open for '11,'12,'13 and '14, assuming, bravely, no inflation. The company's "adjusted pro-forma EBITDA target" for '11-'14 is $5mm+$12.3mm+$17.5mm+$25 mm, or $60 mm total. Sounds like all the money will be going for expansion capex. Call your inner Warren Buffett on this one.
With that, good luck to the new shareholders, and enjoy your cupcakes. I am watching both my waistline and my wallet.
Posted by Barbarian Capital at 17:54
Thursday, January 6, 2011
The two are not mutually exclusive, of course, but here is why Twitter is far superior for me personally.
Twitter lets you plug in conversations and thought streams that otherwise you would have no access to. I am pretty careful in picking whom to follow and read most of what these people share. There is a lot of insightful information available, absolutely free, coming from great (I am sure) individuals, and, often, not available anywhere else. Twitter is less of a burden than "powerblogging" so the diversity of ideas is greater. Someone joked that FB is for people that you went to school with, Twitter is for people you WISH you went to school with.
Twitter users are anonymous, if they choose to be. Anonymity is conducive of freedom of speech. Freedom of expression matters a lot, and people really are hesitant to voice non-mainstream views if they perceive there might be something at stake (professional image, career, relationships). Many people probably would opt not to discuss politics if the shield were not there. In part because of political correctness, there is a growing gap between what is expressed and the actual actions. You can see the gap in dating site behavior studies (stated preferences vs. actual preferences), it sure applies elsewhere.
Twitter is an extension of your information gathering routine. It is not just following MSM twitter accounts. Great people find great things, and share the link. So if you follow great people, every day you will find great articles, underreported news, opinions and interpretations. In many ways, Twitter, when carefully managed, can be a live linkfest that can be read in addition to the "regular" linkfests one follows.
Twitter is unbeatable for instant information finds: news, sport scores in action, stock news, vote counts in progress, Gmail outages, and so on.
Twitter can be interactive and can be used for crowdsourcing ideas. Obviously, people with many followers can't reply (and some people simply view it as a one-directional promotional pipe) be but many do interact. This enables discussions like "has anyone looked at stock XYZ?" Twitter in this case makes you better at what you do (invest or trade) with great ease. Twitter is even good for grounding highfliers: a famous book author (who is not fooled by randomness) was twitting in Arabic one day, so I commented that he does not know that his twits are available to the "unwashed masses" via Google Translate. He put a few untranslatables up and wrote that Google Translate can't do this particular dialect. You win, buddy.
Facebook, obviously, is neither of these things, on top of being a huge waste of time. Surely there are people who value looking at their high school girlfriends' wedding (or beach) albums or their old neighbor's garage remodel in progress. Surely there are people looking for "the cure for boredom" as Mark Cuban said in his great Stocktwits interview. Surely there are "worthy causes" that millions can "support" effortlessly by licking "like" and forgetting about them that very instant. Surely FB enables inter- and intra-country rivalries who can "collect" more people to support soccer team A or the "annexation" of island B by country Y. Surely FB has exceptional information on who you are, where you are, what you click on (even outside of FB) and other valuable targeted ad information. But, by and large, for me personally FB is worth close to nothing. I can see some value for advertisers and social gaming, etc. companies that need network effects.
So, speaking of FB's worth and the breathless coverage it is getting, here's something very basic that I read and re-adapted from marketticker: FB has 500 mm users, and at $50 bn valuation, this means that a user is worth $100 in net income. If the average life of a user is 5 years, this is $20 per year, call it $30 pre-tax. If the pretax margins are 25%, this implies revenue per user per year of $120. That's an awful lot of ad clicks, in my humble opinion. FB really must have a stack of aces up their sleeve. Good luck to the new buyers.
Posted by Barbarian Capital at 15:58
Monday, January 3, 2011
People often mention that the market is "forward looking": that is, market action often forebodes the future. The S&P bottomed out in March 2009, well before the broader economy started recovering. Here are a few 20/20 hindsight observations from 2010. Keep in mind that the S&P had its yearly low in July and returned about 15% for the year:
The surprisingly strong holiday shopping season: XRT, the broad retail ETF, did not have its yearly low in July. It bottomed out in February and got close to that in July. There is probably a certain technical analysis significance to this but, for me, it is evident only in retrospect. XRT started rallying in September (both with the broader market and with the decent back-to-school data).
Did your rent increase this year? The rent concessions by the large apartment REITs (EQR, AVB, UDR, ESS, etc.) started reversing last year and all are now posting solid rate increases on new and renewal leases. When did their stocks bottom? Early February.
The unemployment rate is routinely described as "stubbornly high" be it U3 or the "real" U6. Can we expect some change there? Well, my four employment horsemen, Manpower, Robert Half, Kelly and Monster all outdid the S&P for the year, ditto with the more niche DHX. May be good news are on the horizon even there. Even uniform providers GKSR and UNF beat the S&P (though the largest, CTAS, did not).
We often read that the "rich" are doing very well. What is the story there? Sotheby's, (ticker BID), perhaps one of the purest "rich people" investment plays, bottomed in February, like XRT discussed above. It is up 100% for the year, in case you were wondering how the "moneyed elites" were doing. BMW (owner of the eponymous aspirational car brand but Rolls-Royce as well) also bottomed early and near-doubled for the year. To complete your package, tuck a Hermès in your pocket: up 70%, again, no July dip here either.
Related to employment and retail spending is travel spending: a number of names there are running really hot. PCLN and TZOO were up almost 250% and 90% respectively, the cruise duopoly, RCL and CCL are up 90% and 50% respectively. Hotels are back: the big names, MAR, HOT, WYN, GET, H are up multiples of the broader market, ranging from 50% to 85%. Heck, even "horse and buggy" LodgeNet (LNET) somehow managed to lose only 20% on the year.
And, don't forget the ladies: shockingly, they do want to look and feel beautiful, regardless of billions of pending mortgage putbacks. A semi-random sampling from my "beauty" tracking list shows a pretty picture: LULU up 130%+, Estee Lauder (EL) and Arden (RDEN) up 65%, FACE and Interparfum IPAR 50%+; salon stuff distributor HELE up 25%.
See, isn't hindsight easy?
Posted by Barbarian Capital at 19:54