Daily Dose of Optimism

TheStreet.com Inc Announces Q1 Results

If you read this blog, hopefully you caught my two part rundown on TheStreet.com Inc (part 1, part 2). It was the post-mortem of a sale with a 2+ year holding period. I was pretty ambivalent about the sale, calling it a "55% confidence decision," and although you can never fault yourself for taking gains, looking at the reaction to TSCM's 1Q06 results, I'm kicking myself just a little bit:

I say this because I was one of the few people to publicly voice support for TheStreet.com Inc's business model - and not just as an acquisition target - BEFORE they came out with a strong first quarter, unlike the numerous naysayers who were basically upset that Cramer can talk about stocks on TV and have so much fun at the same time.

Here are the key details from the quarter:

• Earnings per a share for the quarter were $0.10, a $0.13 improvement over the same period last year and a $0.03 improvement from last quarter.
• Net revenue was $11.1 million in the first quarter, a 43% increase over the same period last year and a 12% increase from last quarter.
• Subscription revenue for the quarter totaled $7.6 million, a 41% increase over the same period last year and an increase of 17%, or $1.1 million, from last quarter's $6.5 million. The         number of paid subscribers to the Company's premium services increased by approximately 13,100, or 15%, during the quarter.

I'd say that TSCM's results are bearing out my upside contingency factor #1:

A strong-to-frothy equity market in 2006-7: Not going to wager on the likelihood of this occurring, but I grant that it could.

We've had a strong first quarter, and the second quarter is off to a good start (record highs in major indices), although that could change pretty easily. There is no word yet on my upside contingency factor #2:

A Jim Cramer network TV reality show:  if this happens, it could bring a tremendous retail interest to equity investing, and a boon to TSCM as one of the best-positioned paid content sites. Of course, I readily admit I don't have a clue as to how you make the process of investing interesting for TV.

If you would like to read TheStreet.com Inc's first quarter conference call transcript, it is available on  The Internet Stock Blog here.

If you would like an example of how not to think about internet content companies, feel free to read The Internet Stock Blog's extensive negative commentary on TheStreet.com Inc.

If you would like an example of how in-depth accounting analysis can be used to draw backward- looking conclusions that are not helpful for gauging forward-looking performance, see here. - Ed

Enduring Competitive Advantage? Clear Channel Outdoor (Part 1)

Once the rinky-dink side of advertising, billboards - or by their more dignified name, "outdoor advertising" - represent an "enduring competitive advantage" in what is otherwise a very tough market for advertising dollars.

Whether low-tech or high-tech, billboards are tangible, physical space that cannot be TIVO'd out, and do not have to compete with articles for reader attention.

Looking past "click" ads in search engines (which are brilliant), internet advertising is relatively hokey. Pictures compete with non-visual content (text) and are easy to overlook as "not part of what I came here for."  In contrast,  TV and outdoor ads catch people when they in visual modes, ie, looking and watching.  I read websites for their content, and rarely pay attention to the ads, partly becuase they don't tell stories well (relying heavily on teasers). "Real" magazine ads tell whole or substantive parts of stories on one page, and can employ compelling images to their advantage.

I only watch TV regularly through a DVR now, which means if you are advertising in Seinfeld, Sports Center, or the "OC" (the influence of my girlfriend, I must admit!) in the hopes of getting my attention, you are correctly targeting my demographic, but you are not getting me!

However, as I walk to work, I see a ton of outdoor ads - on phone booths, on billboards - and I can remember them all. Tom Petty and the Heartbreakers at the Borgata. Lifetime television can deliver a female audience so well that men will clamor for their wives again. Time Warner Cable says that spot advertising (which I'd never heard of until I saw the billboard) has changed over the past 20 years - have my perceptions of it as a good medium for advertising changed as well? 

These outdoor ads have a way of catching us at the perfect moment - as I walk to work in the morning, my mind is clear. When I drive, I am generally focused on the trip, trying not to worry too much. They catch me in the same spirit as what I am doing - looking around, scanning my environment. Taking in images.  Reading on the web, I'm distinguishing characters on a black-and-white (or grey-and-white) screen.  Billboards are a quick and easy distraction in an environment when we are prone to being distracted - the real world.

As demographic tools become more sophisticated, and the technology in these things improves, it's not hard to imagine a world where these things function like TVs, changing, moving based on the demographic of people who occupy the space.  The technology to do this already exists, and perhaps when RFID technology is more prevalent, the ads can change depending on the dominant demographic that is in the vicinity at the time. (I am imagining cell phones carrying neutral customer data in chips that can be read from 10-20 feet away - ie, “male, 28”)

Now, this futuristic scenario is pie in the sky right now, but think about it - that bus stand, that billboard, that standalone outdoor ad - it's just space, and its space that is visible and can communicate. If you own that space, you own the present and the future opportunities to something that no one else can really infringe upon (unless, of course, TIVO starts making glasses and sunglasses with filtering technology - but I won't hold my breath for those.)

I've included a list the 20 largest outdoor advertisers so you can see the sort of companies who rely on it - companies that sell products (virtually) anyone can use - cell phones, cars, insurance, beer, etc. I don't think that will change.

Hence my interest in the upcoming Clear Channel Outdoor IPO (Link to Press Release). I know his is not a super original idea right now, and I am also pretty sure that since only 10% of the company will be offered, and other people will agree with what I am saying, the offering might come too expensive to make it worth it.  It would be unfortunate if a billboard company trades at a hot-growth company multiple (on hype about GPS and electronic billboards) when it is pretty much a recurring revenue, moderate growth cash cow.

I guess the trick will be to watch, and wait - this is, and should be, a pretty boring business! It's main virtue right now is that it's not goint to die (like TV and commercial radio), not that it is a radical growth business.

I'll leave this here - consider it part one. More to come as thoughts and process evolves. - Ed

Let's take a run-down of a few industry stats (Courtesy of the OAAA).

Top 10 Outdoor Companies (based on 2004 US revenue) Link

   1. Clear Channel Outdoor
   2. Viacom Outdoor
   3. Lamar Advertising Company
   4. JCDecaux
   5. Van Wagner Communications
   6. Fairway Outdoor Advertising
   7. NextMedia Outdoor
   8. Magic Media
   9. Reagan National Advertising
  10. Burkhart Advertising

Top 10 Outdoor Advertising Categories (based on 2004 year-end  expenditures)

   1. Local Services & Amusements
   2. Media & Advertising
   3. Public Trans., Hotels & Resorts
   4. Retail
   5. Insurance & Real Estate
   6. Financial
   7. Automotive Dealers & Services
   8. Restaurant
   9. Automotive, Auto Access & Equip
  10. Telecommunications

Top 20 Outdoor Brands (based on 2004 year-end expenditures)

   1. McDonald's Restaurants
   2. Warner Various Movies
   3. Miller Various Beers
   4. Verizon Long Distance Bus & Res
   5. Anheuser-Busch Various Beers
   6. General Motors Corporation Var Car & Trucks
   7. Verizon Wireless Services
   8. Cracker Barrel Old Country Store
   9. Chevrolet Auto&Truck Var
  10. Walt Disney Var Movies
  11. Nissan Autos & Trucks
  12. Bank Of America Consumer Services
  13. Diageo Plc Var Beverages
  14. Toyota Auto & Trucks
  15. Geico Insurance
  16. Coca-Cola Various Soft Drinks
  17. Coors Light Beer
  18. Allstate Insurance
  19. Dodge Autos & Trucks
  20. Dreamworks Various Movies

Major Forms of Outdoor Advertising

U.S. Outdoor Industry Spending Over the past ten years (billions)

Growth in Commute Times - Positive for Billboards

 

Major Advertisers Respond to TV's Increasing Challenges

WSJ: Ad Icon P&G Cuts Commitment To TV Commercials (Link)
Top U.S. Advertiser Explores New Ways to Reach Viewers; A Product-Placement Surge
By JOE FLINT and BRIAN STEINBERG / THE WALL STREET JOURNAL
June 13, 2005; Page A1

Procter & Gamble Co., the consumer-goods giant and marketing icon, is sharply cutting how much it commits in advance to buying television commercials next season, according to people familiar with the situation.

The move by P&G, the maker of well-known brand items such as Tide, Crest and Pampers, is the latest sign of rapid changes in how companies reach consumers and TV networks and cable channels draw revenue. In recent years, many big companies have expressed doubts about the effectiveness of traditional TV advertising. Digital video recorders such as those made by TiVo Inc., which make it easier for TV viewers to skip commercials, are growing in popularity, while leisure activities like the Internet and videogames are competing for consumers' time.

 

Taking a Fresh Look at TheStreet.com (TSCM) (Part 1)

Disclosure: I am a paid subscriber to RealMoney.com, and was a shareholder of TSCM up until a few weeks ago. I may open a new position in TSCM at some point in the future. This is a two part writeup; link to part 2 is here. thestreet com inc

Summary:

I bought TheStreet.com Inc (TSCM) about two years ago, and recently sold out of my position around $8 per share (~75% gain, ~32% compound annual return). I am writing up my rationale for the purchase and sale for my own benefit and as part of my 2006 resolution for DDO content.

I have never seen TSCM as perfect, but it has long been good enough. Although news of its dividend is mitigating investor disappointment over the fact that the strategic review ended without an acquisition, I think the possibility for near-term downside in TSCM exists as the market figures out what to make of the standalone business.

Having reflected on TSCM's business model and prospects, I have only about 55% confidence that walking away from the stock for now was the right decision, but it's done and I have other positions to tend to. I will continue to watch the company, as I think TSCM has every opportunity to make this business work through the right mix of services, advertisers and content.

My original investment rationale:

• Peter Lynch: "Invest in what you know." I personally found value in the company's approach to news and commentary. TSCM was getting $300 out of my wallet, which put TSCM ahead of every other media businesses I interact with.
• Margin of Safety: the business had about $25 million of cash in the bank to keep itself going, and was generating about $25 million a year in revenues, a solid base of business.
• Great Brand in Great Niche: TSCM had a great brand in a niche where people are inclined to spend a decent amount of money. I was fairly certain that TSCM would be an acquisition target. (Ed: I still haven't ruled it out!)
• Most newspapers would kill to have a model like TSCM: TSCM is already 100% on the web (no printing costs), gets paid by readers for online content, and has a talented, high-profile writer with serious ownership incentives.
• Diverse News/Commentary Offering: Unlike the WSJ, TSCM doesn't just provide news; it also offers you the opportunity to see how market experts think about companies and situations. Only IBD offers a comparable news and education package, but a fair amount of it is black-box technical analysis, which is not that useful for aspiring fundamental analysts. Despite churn in the roster of TSCM writers, new money managers who can write are added all the time. (These days, investors who write are a dime-a-dozen...)
• Emerging Profits at TSCM: This was proven to be a lark (early 2004), but at the time I bought into TSCM, the company had just posted its first ever profitable quarter ($0.01 EPS in 4Q03). Nothing to write home about, but it was promising.
• Improving the Business Wouldn't Take Much: Although I was (and remain) concerned that TSCM management doesn't really "get" the potential of their site - including coherent, uncluttered web design, RSS, blogs, navigability, AJAX features, etc. - I figured that it wouldn't take much to get on top of this.

Taking a Fresh Look at TheStreet.com (TSCM) (Part 2)

Disclosure: I am a paid subscriber to RealMoney.com, and was a shareholder of TSCM up until a few weeks ago. I may open a new position in TSCM at some point in the future. This is the second part of a two part writeup; part one is here. As with everything on this site, please note the disclaimer at right. thestreet com inc

On February 9th, TSCM temporarily busted the best thesis going for the stock - a potential acquisition - when they announced the end of the strategic review without any further actions to be taken. However, before the stock could crater, TSCM announced a highly unusual move for a company that has lost money almost every quarter since its inception - that it would begin to pay a dividend. This seems to be the driver for new investor optimism.

My thoughts on the dividend: when I had been driving for about a year, I once made a sudden U-turn when I realized I was going in the wrong direction. My passenger said: "I don't know if that was ballsy or brainless." I'm having a similar feeling right now about the TSCM dividend. Sure, I love the fact that TSCM is confident in their ability to generate steady profits, and it is hopefully well-placed confidence.

That said: it's not like TSCM has a track record of building shareholder equity - they've actually destroyed nearly all the equity they ever raised from shareholders. With the dividend, it is as if management is trying to say: "look, we're confident, that even though we've lost money every year since 1999, we're not going to lose money this year. Hey, would a money losing company pay a dividend?" And, if that message is at all accurate, I worry that the dividend is either (a) a short-term step to goose the stock, or (b) a premature step by a company that may find itself...losing money again in a quarter or two. 

But I want to turn back briefly to a potential acquisition: how should investors avoid getting disappointed about the fact that the company wasn't sold in the strategic review? Well, perhaps the answer is to focus on what TSCM has been doing instead: six months after initiating the review, they shut a money-losing institutional business. Nine months later, they post a profitable quarter. Twelve months later, they post another quarterly profit while their star writer helps build subscriber momentum, showing respectable revenue and earnings growth. If TSCM continues to focus on growing top line and cutting costs, one of two things will happen: (a) the stock price will go up, because investors like companies that do this, or (b) they will be acquired by someone seeking a good business with those characteristics. No magic here.

I have learned from experience: sometimes "strategic reviews" lead to deals, and sometimes they don't. Small, unique companies can have a hard time getting sold for a variety of reasons, which can include the fact that acquirors are generally not expert investors and prefer to overpay for assets once the market has proven beyond any doubt that there is something of value. For TSCM, this just might occur when the stock price hits $15-20 / share. (An example of how acquirors do this would be AskJeeves (ASKJ), a decidedly also-ran search-engine deemed a suitable target for InterActive Corp.)

While I don't think TSCM's competitive positioning is anywhere near as poor as ASKJ's was - primarily because there is no dominant retail provider of financial commentary - I could imagine Gannet (GCI), News Corp (NWS), or Knight-Ridder (KRI) deciding that TSCM represented a serious opportunity in paid web-journalism. (I'd include NYT, but I think they're too haughty to ever do business news correctly...) So, count me as optimistic on a potential acquiror for TSCM. 

Now I'll take a look at TSCM's standalone financial results. As far as extrapolating what 2006 growth might look like, we don't have a lot of data to work with. Absent growth through acquisitions, I think the best proxy for TSCM's standalone growth potential in 2006 was the QoQ growth seen in 4Q05. 2004 full year results were pre-restructuring, which makes meaningful year over year comparisons too much work (for me).

4Q05 revenues were $10 million, +22% from 3Q04. (Full year 2005 revenues were $33.7 million, +10% from 2004.) Not exactly Google-growth, but not bad.

Net income for 4Q05 was $1.8 million ($0.07 / share), an increase of +$0.2 million from 3Q05. That's +12.5%.

As far as valuation goes, for 2005, I think you need to exclude discontinued operations, getting to a "normalized" EPS of $0.23. (Hopefully there were no extra expenses stuffed into the discontinued operations charge, but only time will tell.) At $8 / share, that's about a 35x P/E, which is generous for a standalone, dividend-paying company with full year earnings growth likely to come in <15%. Clearly, a healthy control premium is still baked into the current valuation.

Prescriptions for the future: As I wrap this up, I'd like to toss out a few ideas for how TSCM might grow the company going forward:

• Acquisitions: if organic growth at TSCM is too slow, the company could pursue a MarketWatch type strategy of acquiring strong content providers, such as Agora Financial - even TSCM's blog nemesis: SeekingAlpha! (Why not?)

• New product managers with web savvy: to help guide web presence, content, cross-selling of services, and partnerships with 3rd party providers for new products to sell to TSCM subscribers. It's not clear that Clarke needs to go, but he just doesn't seem to spend that much time surfin' the web. At least hire someone who is undisputably a web junkie to guide aspects of the company's progress.

• Growth as a content provider: There are a few possible tacts here - become a differentiated headline news writer (ie, don't parrot the tired writing styles of WSJ, AP, NYT), and/or become a "long-tail" article writer (focusing on mid, small, micro-cap stories), etc. TSCM, more than any other news provider, is positioned to update its news coverage for more efficient information. And get those stories syndicated as widely as possible.

For potentially crazed growth, two outliers could really make TSCM go:

• A Jim Cramer network TV reality show:  if this happens, it could bring a tremendous retail interest to equity investing, and a boon to TSCM as one of the best-positioned paid content sites. Of course, I readily admit I don't have a clue as to how you make the process of investing interesting for TV.

• A strong-to-frothy equity market in 2006-7: Not going to wager on the likelihood of this occurring, but I grant that it could.

So, there you have it. I'm out of my position, but I'm not bearish on the stock. I have my druthers about where the company is trading right now, but I may consider buying again. - Ed thestreet com inc  thestreet com inc  thestreet com inc

Understanding Investor Psychology

Chipotle (CMG)...the local burrito joint goes corporate...

Link to SEC S-1/A - Jan 23, 06

Chipotle is about to go public (ticker: CMG), and I watched the roadshow presentation last night on Retail Roadshow, a great site I've written about before. Here are a few thoughts based on my experience as a customer, reading the S-1 and watching management.

The Business: I love eating at Chipotle, I really do. No burrito place in NYC can compare, especially Burritoville (I mean, seriously, how does brown rice belong in a burrito?)

In college, I ate a damn lot of burritos. I've enjoyed this Mexican haute cuisine for many years. It is cheap, fast, and relatively healthy. As a working man with an aversion to cooking, if there had been more good burrito joints in NYC when I first got here, I would have extended this phase several years beyond college.

Unlike American "fast food," the ingredients for a good burrito are basic foods about as close to unprocessed as you can get: meat, beans (black), vegetables, tortillas. (Never mind chips and salsa.)

Now, I never actually checked the calories and fat content of the burritos I ate, and Chipotle conveniently has "not yet calculated this." But, with a little homework, Google Answers has a lengthy dialog estimating Chipotle clocks in at about 1,000+ calories. Not exactly "light" fare, but unlike a Big Mac and fries, a burrito is a hearty meal that will keep you going.

The Concept: Watching management, it's funny how they try to dress up the fact that they are basically the first truly national, corporate version of the typical local burrito bar. It jives me a little bit to hear them talk about how their model is innovative when it so blatantly is ripping off a model pioneered by Mexican migrants - credit where credit is due! In this spirit, I thought I'd point out a few ULLs (unintentionally laughable lines) from the management presentation:

• CMG says they are credited with having inventing "fast casual" dining - presumably titled so because burritos are as fast as fast food, and as wholesome as casual dining. Now, I agree that Chipotle is efficient, but I can't credit them with much more than paying attention to lines and staying true to the original vision of a simple process.
• CMG presented the fact that making burritos requires only a few inputs as a unique selling point - "only [around 130] SKUs in the process." Now, having eaten at Jack-in-the-Box (JBX) recently, it is clear that with about a thousand different items on the menu, this is a positive from a cost perspective. But, again, hard to see this as an innovation.
• CMG's stores are clean, bright and play snazzy music, and their food is from identifiable, earth-friendly sources, none of which can be said for most burrito bars. Now, this is somewhat of an innovation, as it helps them distinguish themselves from other fast food restaurants. But, I'd note that particularly at their price point, the "commitment to origins" isn't a requirement to do well. On the low end of the fast-food spectrum, McDonald's proved that you can build a global food powerhouse on deep fried mystery meats, and among firms on CMG's level, burrito places taste as good or better without special ingredients.

How about this for an easy way to explain the model? Chipotle is what burritos would be like if Starbucks sold them. (ed: We'll add to this the realistic possibility that burritos become the next hamburger.) Obviously, Starbucks doesn't take credit for running hot water over ground beans, and the idea of a nice place to sit and caffeinate yourself has long been a fixture of cities around the world. Starbucks' innovation was that you could make money off formerly-cheap products in a fragmented market through quality, "experience," and ubiquity, only one of which (ubiquity) is something that most fast food restaurants understand.

Key Risks: The two things I could think represent real risks to this business are:

Short-Term Risks:

• Realized growth rate slows along with store opening: I imagine that investors will over-extrapolate from the observed earnings growth rate, which was driven by a hectic pace of new store openings, to the future growth rate, which will be driven more by same-store-sales as store openings slow. This means the potential for a lot of optimism around the offering, followed by a "sobering up" period, as the business encounters limits to growth from the stores they have. You can see the planned vs. opened stores here:

Table of Open / Under Construction Restaurants (From S-1)

			Stores in operation		Stores under construction
Arizona			21		2
California			67		2
Colorado			55		—
District of Columbia			6		—
Florida			14		1
Georgia			10		—
Illinois			47		—
Indiana			6		—
Kansas			12		—
Kentucky			5		—
Maryland			21		—
Michigan			0		3
Minnesota			36		1
Missouri			8		1
Nebraska			6		1
Nevada			5		—
New York			13		1
Ohio			60		2
Oregon			5		—
Texas			60		—
Virginia			20		1
Washington			4		2
Wisconsin			8		—
	Total		489	(1)	17

Longer-Term Risks:

• Saturation of the US - not really on the horizon anytime soon, as you can see in the table above, but they're getting there. As long as the company has clear territory to open restaurants in, I think diners will continue to discover the pleasures of a tasty burrito. (Alaska could surely use a few burrito joints.) Open question: can we expect that burritos will become as popular as hamburgers or coffee? They are actually more popular in my family, so quite possibly.
  
• Increased competition in any of its major markets from Wendy's (WEN) "Baja Fresh" or CKE Restaurants' (CKE) "La Salsa". I haven't had La Salsa, but Baja Fresh is damn tasty. Burritos are a commodity, and there is no "best" way, and sometimes, frankly, the worse the origins of their ingredients, the better.

The Numbers: I'll take this summary from Forbes.com, although feel free to look through the IPO prospectus yourself:

In 2004, revenue totaled $470.7 million, up 130% from 2002 and 49% from 2003. The increase was driven by new-store openings and increased sales at existing stores. The company opened a total of 237 stores in 2002, 2003 and 2004. Average sales at new stores in the first 90 days of business increased about 29% to $303,390 in 2004 from $234,450 in 2002.

For the nine months ended Sept. 30, Chipotle reported net income of $33.4 million on revenue of $454.4 million, compared with net income of $9.8 million on revenue of $341.8 million for the same period in 2004. The company reported losses of $7.7 million in 2003 and $17.3 million in 2002. [...]

Of Chipotle's 489 stores open on Dec. 31, 2005, 184 had opened since Jan. 1, 2004, and rapid expansion is planned in the next three years. This could make future results uneven, and a misstep could hammer earnings. But more than that, Chipotle doesn't have an extensive operating history as an independent company, making it difficult to evaluate its future prospects.

Conclusion: I think I've about covered it, let me know if you would add any salient points.

I love the product, think that the growth prospects are good, and think that the company should do fine. Hot trading around IPO pricing will make this one tough for small investors to get into initially. - Ed

Reminder: Please see disclosure at right.

Google (& Microsoft), Thy Enemy is Within

Paul Kedrosky brought my attention to this news article, which I should have ignored and left well enough alone. But, here goes:

WSJ: Google plans to announce Friday that it will begin allowing consumers to buy videos from major content partners through the Google site and will also roll out a new downloadable bundle of software for consumers that could heighten Google's competition with Microsoft...

[Google Pack will allow consumers to download and install multiple applications through one interface, which will include] the open-source Firefox Web browser, a version of Norton AntiVirus software from Symantec Corp., Adobe System Inc.'s Reader software, RealNetworks Inc.'s RealPlayer multimedia software, Trillian instant-messaging software from Cerulean Studios and Lavasoft AB's Ad-Aware antispyware software. Google Pack will also include Google's own desktop search software, Google Earth satellite imaging and maps software, Picasa photo-management software, Google Talk instant-messaging program, its Toolbar add-on for Web browsers and screen saver software. (Note: Full article is after the jump at the end of this article)

(1)

I feel like the Microsoft vs. Google battle has a strong dimension where two parties are fighting for turf while leaving their home bases unprotected.

A business historian will someday precisely document when it became an anathema for major technology firms to focus on their strengths and competitive advantages, as opposed to trying to be all things to all people. I want to say that they get tricked into it by the hoopla generated in the press, as though the objective were to win the attention of journalists, rather than make money.

This must be why startups are able to trump majors on innovation in virtually every product category, because startups focus on doing only one thing right, have no media attention to distract them, and, lacking a brand to use as a billy club in distribution, their only hope is to focus relentlessly on user friendliness and product quality.

Microsoft: here is a company with not one, but two of the most enviable monopolies on the earth - in both OS and Productivity Software (PS). However, instead of focusing on putting a fast, usable OS into every electronic device on earth, or making the Office suite even more usable, integrated, etc...we get MSN...MediaPlayer10 (vs. iTunes), etc... all from a company focused on growing everywhere except where it has the most unique advantage of any business in the world today. I am seeing more and more cars with GPS computers in them that have a few other functions...I don't see Microsoft anywhere.

From an OS perspective, the miracle for me right now would be an OS that could run "ultra lite" - even if your PC was three years old - with super fast boot times. Of course, each subsequent upgrade to Windows also seems to require a several thousand dollar upgrade to my computer, which, frankly, I would prefer not to need to do, having already jumped through that hoop a few times. Why can't a new OS make my 3 year old laptop run faster? That would be awesome, but it might require Microsoft to realize that its fortunes and Intel's fortunes - predicated on ever increasing spend on hardware along with software - doesn't have to proceed hand-in-glove.

Google: I keep thinking that rather than rolling out another bunch of random betas and marginally useful consumer applications they've built or acquired, Google should get more meaningfully into... search.

For example: instead of "Google Scholar," which for however long it's been available, I've never used...they could make search engines tailored to specific functional requirements...like "Google Investor," "Google Lawyer Researching a Case," which could utilize paid add-in search modules for proprietary databases and bring valuable new meaning to the phrase "just Google it."

Google spends so much time jawboning about "opening up information"...and yet, I wonder if they're trying to open up the wrong information in the wrong ways, when so much of great information - the stuff you have to pay top dollar to get today, like historical news stories, legal searches, etc - will remain locked up and "outside the scope" of what Google can do. Alexa at least seems to realize that customization is probably the next step for search.

The fact that Google hasn't done any of these things yet makes me wonder whether they really understand search, or whether they weren't just very lucky in developing a better mouse trap for finding web pages with their original relevance algorithm, and have since chosen to focus their business on things that create maximum hype. Perhaps that relevance algorithm doesn't work as well when there aren't links to signpost importance, and if not, that sounds like an opportunity for a search startup to me.

(2)

One of the few things I understand about the "Google vs. Microsoft" fantasy is that GOOG could eventually build an OS that would allow them to "cut Microsoft out of the loop." Of course, why Google would bother building an OS when they seem plenty capable of making scads of cash with search alone eludes me. Perhaps the "Google Pack" is a step in the direction of an OS.

Let's sum up Google's contributions to the pack:

• Cash - for development, etc
• The Google Brand
• Google's Software Applications

When I think about it, it seems that the "Google Pack" is a trojan horse for Google's "software development" efforts, one which bundles big-brand, must-have applications like Firefox, Norton AntiVirus, and Acrobat Reader along with disposable, lesser apps, like Google Desktop Search (by my testing, clearly inferior to Yahoo's), Google Talk (inferior to _____) ... just to get Google products on people's desktops, because Google's products aren't useful enough to merit downloading them on their own. (But if they could trick people into installing them...)

On the subject of a trojan horse, there apparently will be a "Google Updater" bundled in the pack, which would presumably allow Google - as does Microsoft - push out ever more crap to the desktop without users really knowing about it. (Don't be evil...yeah right!)

While reflecting on all this, I also realized that...Google-developed applications like Talk and Desktop Search are weak, while the "not invented here" Google applications (Picasa, Earth) are the ones I would recommend, even though I grant that all are of questionable utility.

Here's where I'm going with this:

Is it possible, from a software-development perspective - the very capacity that would theoretically drive Google's much-ballyhooed ascension to Microsoft-like domination - that Google has already developed a culture like the Microsoft of today?

Even at Google, a company full of the most-hyped engineers on earth, the most innovative software is still written by relatively capital-starved startups, who are in turn bought bought by big hubristic companies whose primary competitive edge over these nobody-startups is their brand and ability to raise capital in share lots matching the digits in Pi.

Said another way - Google's software development strategy is awfully "Microsoft-ean" in it's implementation. (Google, thy enemy is within.)

In fact, given that Google doesn't seem to have a real edge when it comes to software development, it also seems unclear how they would ever take over the desktop OS, unless someone smaller did it first, and Google bought them...

But now I really may have run on too long. Let me leave with this thought:

With one great near-monopoly that butters most of its bread, a bunch of lesser, derivative ideas funded by it's core business, and a big balance sheet, Google, the company most-hyped to become the Microsoft of the future, already sounds a lot like Microsoft right now, only Google's monopoly is less defensible, and is not being guarded.

And if that's at all true...

Remind me again why people pay a 50-100x multiple for this company? - Ed

Univision (UVN) - A Growth Play on What, Exactly?

I read an article about Univision ("UVN") in Barron's a few weeks back, which got me thinking about the company. At the time of the article, UVN had missed earnings by a penny, and the stock was off 8% in one day.

That was a pretty sharp move, so I took a look at the company's valuation to get a sense of what that 8% move meant for the valuation.  As far as what it meant for buying the company cheaply, the answer was...not much.

I think one can say that UVN investors - even after an 8% decline - are "in love with this stock": it trades at ~5x revenues, ~40x ttm EPS and ~25x 2006 EPS. Link

This got me thinking:

What is it about Univision that investors are so excited about?

Although I thought I knew what UVN did, I took another look at the company to be sure. From Yahoo Finance (paraphrased):

Univision is a Spanish-language media company selling to the rapidly growing US Spanish-speaking population, and apart from four radio stations in Puerto Rico, UVN's media (radio, TV, internet) assets are entirely focused on the United States. Link

Ok, that's pretty much what I thought. Univision is a ubiquitous-yet-invisible company responsible for wacky Mexican game shows, talk shows, news, and most of the soccer that is broadcast in the US.

I say Univision is ubiquitous because it broadcasts pretty much everywhere, but it is also invisible because - if you are a native born English speaker - you don't really notice it.

But, so far, I haven't answered my question. What is so exciting to investors about this company?

Although there may be enduring nostalgia amongst immigrants who've lived here a while (20+ years), I have to think that after a point, the other 100 channels of entertainment available would be a distraction from Univision's programming.

Hence, I would assume that the core UVN audience consists of recent Latin American immigrants with weak-or-no English skills.

Given that immigration is ultimately a government issue, meaning that it is sensitive to the whims of citizens and politicians, I think this is a growth area that I am skeptical of being able to continue unmolested.

From reading around the web, I have seen a fairly strong current building for immigration reform, including strict border controls and low-to-no tolerance of illegal aliens. 

Terrorism is a huge driver in this, as to a lesser extent are domestic jobs, drugs, crime and tax/social services issues.

Some key items I've seen, in no particular order:

• Hillary Clinton, who has no doubt been polling Americans in preparation for a bid for the presidency, made headlines with this news: "Saying that she is strongly opposed to "illegal immigrants," New York Sen. Hillary Clinton announced Tuesday that she would support a national identification card for U.S. citizens if other measures to keep illegals out of the country failed. "I am, you know, adamantly against illegal immigrants," Clinton said. Link

• Bill Richardson, New Mexico's governor, declared a state of emergency along his state's international border, prompting criticism from Mexico's foreign ministry. Janet Napolitano, Arizona's governor, did the same this week. Link

• The "Minutemen", a group of citizens who want the government to enforce a strong border policy, and who have taken to setting up their own watches in light of what they see as an egregious failure by the INS to take the border seriously. The leader of the organization is running for congress in California.  Link

• Pat Buchanan proposed (8/29) that the Republican congress should impeach President Bush for his failure to enforce immigration laws. I think it is an easy argument to make that Pat Buchanan ceased to represent mainstream conservatives a long time ago, but also bear in mind that "mainstream" ideas begin on the fringe. Link

• The amount of web "ink" devoted to the issue of immigration continues to increase. A recent example: Michelle Malkin, one of the top 10 most popular bloggers on the web (about 90,000 hits per day), recently started an "Immigration Blog" which as you might imagine, isn't focused on how to make immigration easier.  Link

Now, as a citizen, I'd personally say that UVN's growth is negative for America because the more comfortable people are living and working in the US without learning to speak English, the closer we get to an explicit "caste" system, where those who can speak English get to have a say in how the country is run, and those who can't get to bus our tables.

But as an investor, I'd say that for all the growth hype in UVN, buying the company involves paying a 5x revenue multiple for a company that operates in a government-regulated industry, albeit a historically lightly-regulated one.

I find it a perplexing conundrum as to how investors are buying a growth stock that is pretty much captive to federal decisions. Perhaps they think Americans are misguided to be anti-immigration, or perhaps they think that American's can't ever be serious about reform.

Of course, the reason investors may be in love with Univision is that they aren't fully aware of issues facing the company, or are heavily discounting their potential impact.

Drinking too much sell-side and company kool-aid can have that effect.

My sense is that investors in UVN are probably benefiting from the high-watermark of immigration to the US right now. (Recent evidence of a record number of border crossing deaths this year is an indicator of the volume).

I don't think conditions for entering the US legally or illegally can remain this easy for long.

As a result, I think it is unwise to take a bet on the growth as priced at Univision, considering its ultimate dependence on negligent government regulation and public sentiment. - Ed

Whitney Tilson on Berkshire Hathaway (BRKA)

Smart value investor Whitney Tilson on the case for Berkshire Hathaway as a value investment (Dec 2004):

WSJ: Berkshire’s Class A shares change hands for about $85,000, barely higher than Tilson and Tongue’s estimate that Berkshire has about $70,000 a share in investable cash and investments on its books.

The market, therefore, values Berkshire’s many operating businesses, including Dairy Queen and Fruit of the Loom, at only about $15,000 a share.

The Class A shares are “easily worth” $100,000 to $110,000, Tilson said.

Download Tilson_BRKA.pdf

Looking at the BRKA 10q, I believe he is basically taking the $107 billion of cash, equity and fixed income investments that Berkshire holds, against its market cap (which as of Friday was ~$128 billion). BRKA 6-30-05 10q Summary (Yahoo)

This gives you an implied value of the non-public businesses at $128 - $107 = $21bn (this difference was $15 billion when the article was originally written, Dec 2004).

To determine your upside, you need to look at the non-public operating businesses and derive a fair value for them; the difference between your determined fair value and $21 billion will give you the amount of upside you stand to gain in BRKA if: a) you are right and b) the value is recognized by the market or unlocked by the company.

This would not be a short term investment, but pending further examination, likely a sound one. - Ed

Wilbur Ross - International Coal Group

Two posts on Wilbur Ross in one day. Consider it a sign of the new investment climate, where capital is moving to opportunities that would have been laughed at five years ago, and in some circles, still are.

Ross has a new venture - the International Coal Group - which has currently filed for an IPO. (Perhaps you see what I mean now about watching the International Textile Group).

International Coal (Ticker: ICO) was formed by WL Ross in May 2004 to acquire and operate coal mining facilities. The company is run by a former executive of Arch Coal (Bennett Hatfield).

Link: Yahoo Finance - International Coal

Link: All SEC Filings - International Coal

Investor demand for coal can be seen in the 1Q05 IPO of Alpha Natural (Ticker: ANR), which is up ~40% from its IPO price (2/14/05). 

International Coal is currently on a path of acquiring and opening coal mines. It recently paid $300mm to acquire Anker Coal Group, and also plans to buy CoalQuest for $102mm.

International Coal reported pro forma revenue of $674 million and net income of $15.4 million in 2004 (2.3% margin). ICO cited growing coal prices and increases in demand as power plants demand more fuel, more electrical generation facilities are built and the U.S. industrial sector continues its recovery.

The Wilbur Ross Formula can be seen at work here, with more details in the news article from the Daily Bankruptcy Review below. The formula: unloved, unwanted properties that the world needs more than it realizes. See also the map of US coal properties from the S-1 at bottom. - Ed

Dow Jones - Daily Bankruptcy Review:

International Coal Group Inc. plans to invest $200 million to open a new underground mine near Grafton, W.Va., according to the Associated Press Construction could begin in 2007, said Gene Kitts, senior vice president of mining services at International Coal Group. The Taylor County mine would produce about 4 million tons of coal a year and employ up to 350 people. The company, headed by New York billionaire Wilbur L. Ross, would also build a preparation plant that could process up to 2,000 tons an hour, he said. “We’re starting preliminary environmental monitoring now,” Kitts said.

International Coal Group, which is moving its headquarters to Charleston from Ashland, Ky., also expects to have about 190 million tons of coal reserves on 65,000 acres of property near Knottsville, southeast of Grafton. Ross and partners bought most of Horizon Natural Resources Co. after an August ruling by a U.S. bankruptcy judge that Horizon did not have to honor union contracts that guaranteed benefits for the miners. Hundreds of miners protested during the court hearings in Kentucky.

Kitts said ICG had an open house last month to discuss the Taylor County mine with area residents. “We’ve received nothing but encouragement from most everyone we’ve talked with in regard to this investment in Taylor County,” he said. “It is creating quite a bit of excitement.” ICG has one active mine in West Virginia: The Birch River Mine near Cowen, which employs more than 200 people. The company also operates coal mines in Kentucky, Illinois, Maryland and Pennsylvania.