Daily Dose of Optimism

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.

 

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.

Who Says Reading Prospectuses Isn't Rewarding?

I came across the IPO prospectus attached below while cleaning out my hard drive recently, and rather than just delete it, I thought I'd post it.

While potentially offensive to a small segment of readers, I think primarily this one gets filed in the "I can't believe something like this actually exists" category. (I am referring to the prospectus, not the company).

Although I can't find signs that the Daily Planet is still traded publicly, I believe the company is still operating. A description from the prospectus is here:

Established in 1975, the Daily Planet is a genuine Melbourne icon. As one of the largest operating licensed brothels in the world, it has the enviable reputation as a leading player in the industry.

Gotta love those Aussies. - Ed

Download daily_planet_prospectus.pdf

Two Investment Bank IPOs in the Pipeline

I will be interested to read the filings of SG Cowen and Thomas Weisel, two investment banks which are planning to go public. Following on the heels of Lazard and Greenhill, both of which made the case for themselves based on their strength in M&A advisory, it will be interesting to see how TW and SG Cowen sell themselves, seeing how neither of them has (to my limited knowledge) an obvious advantage in the otherwise commoditizing world of investment banking / investments. For example, I had almost forgotten that SG Cowen existed, which makes me wonder whether Societe General is simply seeking to divest itself of a weak franchise with poor prospects. - Ed

Oct 14 - France's Societe Generale is planning an initial public offering for its broker-dealer unit SG Cowen, the New York-based firm that provides an array of investment services, including underwriting, equity research and merger advice. Link

Oct 19 - Investment bank Thomas Weisel Partners Group Inc. filed with regulators on Wednesday for an initial public offering of $65 million in common stock.  Link

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.

Wilbur Ross - International Textile Group

Wilbur Ross, successful turn-around investor, is is investing in a $100 million textile plant in China that will export to the US and other countries.

I find this interesting for a few reasons:

1. Wilbur Ross has a knack of identifying unloved industries that face significant structural challenges and turning them around
2. Ross successfully combined unwanted US steel assets into the International Steel Group, took them public, and sold them in April 2005 to Mittal Steel, the Indian steel conglomerate. Investors in this company did very well.
3. Ross formed the International Textile Group in 2004 (private company), which is a combination of US companies Burlington Industries and Cone Denim.
4. Although this new Chinese factory employs 700 workers - slightly more than the 500-600 US workers laid off in the creation of International Textile Group - it is possible that Ross intends to bring the companies together into one entity, creating an international textile manufacturing business with knowledge of production, pricing and distribution in multiple markets.
5. The combination of these companies into one could create a compelling investment opportunity for US investors should the company be brought public.

I still have much to learn about textiles and the opportunities in this market. What I know now essentially consists of the perception that it is a competitive, low-margin business that the US is exiting because we can't compete with imports from abroad.  This perception, which would drive the average investor to think this is a waste of time - better to focus on Google! - is the first sign that this is something I should consider.

Here's a link to a profile of ITG:  Link - Yahoo Finance: International Textile Group

This news is almost two weeks old (published 7/12/05), but I'd say the ability of most American investors to do anything with this specific knowledge is still up to a year away.  - Ed

Ross To Invest In China

Buyout specialist Wilbur Ross, who has invested heavily in battered industries in America, is investing in a $100 million textile plant in China that will export to the U.S. and other countries struggling to cope with a flood of Chinese imports, The Wall Street Journal reported Monday. Wednesday Ross is scheduled to preside at the groundbreaking of a denim-making plant in Jiaxing, outside Shanghai. He is investing with luxury retail investor Silas Chou, who co-owns fashion label Michael Kors and jeweler Garrard. Details of the shareholdings in the venture aren't known.

At full capacity, the factory will produce about 36 million square yards of fabric a year and the investors expect that annual revenue will be $100 million. Ross and Chou believe that China will become a significant center of textile and garment production. Chinese textile and apparel exports have surged this year following the lifting of a global quota system, prompting the U.S. and several other countries to impose special quotas which are permitted under terms of China's entry into the World Trade Organization.

At his factory in China, Mr. Ross will employ about 700 workers - slightly more than the 500 to 600 U.S. workers laid off when he consolidated several bankrupt textile makers to form International Textile Group in 2004.  (Source: Dow Jones' Daily Bankruptcy Review)