Thursday, October 22, 2015

Under Armour - Accentuate the Positive

It is often amusing to see what companies highlight in their earnings reports and what they try to bury (or de-emphasis).  Today, Under Armour provided an excellent example of why it pays to read beyond just the bold print.

Here are the headlines and the sub-headlines at the top of Under Armour's Q3 earnings release

Under Armour Reports Third Quarter Net Revenues Growth Of 28%; Raises Full Year Outlook

- Third Quarter Net Revenues Increased 28% to $1.20 Billion, First Billion Dollar Quarter in Company's History

- Raises 2015 Net Revenues Outlook to Approximately $3.91 Billion (+27%)

- Updates 2015 Operating Income Outlook to Approximately $408 Million (+15%), Inclusive of the Impact of the Connected Fitness Acquisitions

Not bad, eh? Note all the positive words... "growth", "raises", "increased", etc

Later on in the release, is a section called "Balance Sheet Highlights"... a curious choice of words to be sure.  Here it is:
Cash and cash equivalents decreased 36% to $159 million at September 30, 2015 compared with $249 million at September 30, 2014.  Inventory at September 30, 2015 increased 36% to $867 million compared with $637 million at September 30, 2014.  Total debt increased to $905 million at September 30, 2015 compared with $192 million at September 30, 2014, primarily reflecting borrowing to fund the two Connected Fitness acquisitions. 
So cash is down, inventory is up, debt has exploded...  and these are HIGHLIGHTS.

Investors should also note that shares outstanding are up, diluting their ownership.  Cash flow from operations is hugely negative and getting worse. In the last 9 months, UA has reported ~$127 million in net income (be still my beating heart), while "burning" through over $1 billion in negative CFO, capex, and acquisitions.

It might be important for UA shares to remain in the stratosphere.  No surprise then that it is all onward and upward  according to Kevin Plank who stated in the release:
We are experiencing powerful brand momentum in 2015 and we continue to invest to capitalize on our success in the near-term while establishing the foundation for sustainable growth in the future.
Happy talk is great, but at a $20 billion market value, it pays to be skeptical here.  And don't just read the headlines.

Full Disclosure:  Short UA (now)

Tuesday, August 25, 2015

Sexy vs Not - Automotive Edition

I'm no fan of the auto industry in general, but you wouldn't blame the "Old Auto" world for being a bit punchy these days.  "New Auto" can do no wrong...

General Motors (GM) 
$43 billion market value
Reported sales for the last 4 reported quarters ~$150 billion
Reported earnings for the last 4 reported quarters ~$4 billion
Dividend Yield --->  4+ percent
Today's Stock Move --->  DOWN

Ford (F)
$52 billion market value
Reported sales for the last 4 reported quarters ~$140 billion
Reported earnings for the last 4 reported quarters ~$3.5 billion
Dividend Yield --->  4+ percent
Today's Stock Move --->  DOWN

Tesla (TSLA) 
$29 billion market value
Reported sales for the last 4 reported quarters ~$4 billion
Reported earnings for the last 4 reported quarters ~ NEGATIVE $400 million
Dividend Yield --->  ZERO
Today's Stock Move --->  UP

Losing faith in the market?  Look in the mirror...

Friday, August 14, 2015

Day Trading Cab Drivers are No Longer Enough

Some of us (sadly) are old enough to remember the Internet Boom.  I recall vividly the stories of cab drivers day trading behind the steering wheel.  All were making millions, of course.

The word "Boom" was shortly thereafter replaced by "Bubble". This stock market game is easy.  No analysis required.  As if on cue, the media is on the hunt for the everyman financial genius.

Cab drivers are passe these days. It's all Uber, now, you know! But all of them are in hiding, so our intrepid reporters have thrown a somewhat wider net.

The new center of the financial universe is PRISON.  A murderer picking stocks from the "C Block"?  That's the stuff that builds journalism careers!

What a shock that the "Oracle" loves Twitter and Facebook...  He IS a genius!

History rhymes (again).

Saturday, August 1, 2015

Forbes - "Apple has less cash than people believe"

Bravo to Forbes and Chuck Jones for putting the Apple cash situation into a more realistic light.  Nearly every media outlet proved their ignorance after earnings by touting "Apple now has $200 billion in cash!" 

Talk about one side of the story...

Jones does an excellent job of explaining that the LOCATION of that cash matters (think taxes) and that rising debt levels mean net cash is little changed.

Thursday, August 9, 2012

Absolute Value: LNKD vs DLB

On Friday, August 3rd, the shares of Dolby Labs and LinkedIn Corp each moved roughly 15%.  Unfortunately for Dolby, the respective price movements were in opposite directions.  And DLB shares were the ones taking a hit.  That's what a “disappointing” earnings report and negative revisions gets you! 

 At that same time, LNKD shares were basking in the continued glow of rapid revenue growth causing CEO Jeff Weiner to say that his company is “not like other social networks.”  One possible translation is that LNKD is more professional than social.  Another translation?  LNKD shares go up. Take that, Facebook (FB).   

Indeed, if Mr. Market is correct, LinkedIn will enjoy a very bright and future.  It is a growth story after all... and I'm told that those tend to have happy endings.  This is in stark contrast to Dolby, a company that has committed the cardinal sin of slow to no growth. 

Despite these divergent perceptions, DLB and LNKD have a few similarities.  Both are tech companies, based in California (oddly enough), with dual share structures that grant insiders super-voting powers.  They don’t sell physical products, but rather sell access to intellectual property.  And currently, quarterly revenue for both companies is over $200 million a quarter.  So coincidentally, DLB and LNKD should each post some $900 million of 2012 revenue.

These similarities came to mind as I read Friday's earnings reports and came to the exact opposite conclusion(s) as the crowd.

What struck me first?  Despite similar current sales levels, LinkedIn is valued at $11 billion in the market, while Dolby’s valuation is just $3.5 billion.  In a world of relative measures, I sometimes wonder if people look at these absolute measures.  The disparity is enormous.  Such is the power of perception and high growth expectations.  And these are notions that LinkedIn works hard to cultivate in their earnings release.  Who can blame the company for pointing out 89% growth in quarterly revenue compared to the same quarter a year ago?  It is remarkable.

LinkedIn loves these relative measures for good reason.  It tells a story of success.  The first absolute number mentioned in the recent earnings release is 175 million - the number of LinkedIn members.  It is another monster number and management is rightly proud of it.  But all these numbers seem a bit small when measured against an $11 billion market value. 

And how about a few other rather important numbers?  LinkedIn earned $2.8 million for the quarter and $7.8 million for the last reported 6 months.  Compared to the numbers above, these look woefully inadequate.  It is hard to turn members into revenue.  It is harder still to turn $1 of sales into a profit. Perhaps this is why the company doesn’t put the same emphasis on absolute profit numbers as it does on relative measures like revenue growth?

It takes a bit of calculation to see that shares outstanding are also up approximately 10% year over year.  That’s a pretty big hole your friends on LinkedIn have cut in your pocket!  You gotta love stock options.  Not surprising, this is a growth rate that the company doesn’t highlight.   Indeed, with dilution like that, it doesn’t take long for EPS growth to go negative despite robust revenue growth. 

So the next time you hear about a growth company, it might help to find out WHAT is growing and if the growth is accruing to shareholders or taking away from them.  Revenue growth is great, but it is not necessary or sufficient to create shareholder value.  So this brings us to Dolby.

Dolby is a company that is far from perfect.  Chief among these is the issue of governance.  You really must read the proxy if only for its comedic value.  The lengths controlling shareholders will go in order to nickel and dime their corporate offspring is staggering.  Make no mistake, this is Ray Dolby’s company and he does what he wants with it.  The company rents from him (from offices to condos).  Employees park in his parking lots.  There are the expected salaries, fees, and perks (office space and laboratory access).  But my favorite: The family can use the corporate screening rooms up to 10 times a year for personal use.  

If I ever become a billionaire, please remind me to build my own screening room to avoid embarrassing disclosures like this!  

Either way, as proxies go, Dolby’s is very fun to read.  But you can’t help being bit depressed when doing so, especially if you are an outside shareholder.  It really is Pyrrhic victory for controlling shareholders, but they never seem to learn.  Sooner or later, the market takes note.  And Mr. Market has certainly marked down DLB shares.  Governance has got to be an aggravating part of that equation. Dolby would control DLB with or without his dual shares and "related transactions", but in exercising this extra bit of control, he's cost himself and other shareholders dearly. 

Nonetheless, for all its warts, the company is still wildly profitable… and undervalued.  This is in stark contrast to its much cooler and faster growing Golden State neighbor.  LinkedIn has similar warts but without a bargain basement price to compensate for the risks.

In a “disappointing” quarter (according to the headlines), Dolby (the company) made over $60 million in the most recent quarter.  Free cash flow generation averages $80-$100 million a quarter.  The cash flows quarter after quarter after quarter.   It’s enough to make my cold, dead, capitalist heart jump for joy. The result: $1.3 billion in cash and investments on the corporate balance sheet. 

By comparison LinkedIn has $600 million or so in cash.  Not bad, but there is that issue of price again.  Neither company has any debt to speak of.  They don’t need it.  Dolby is awash in free cash flow of $300+ million a year and, well, LinkedIn can just issue stock.

Dolby and LinkedIn provide a stark illustration that absolute numbers matter little in the current investing environment. Looking at the numbers in their totality, few people would assign a value of $11 billion to a company that barely makes a profit.  Only when the name “LinkedIn” is added do people lose their collective minds.  Similarly, remove the name “Dolby” from the top of DLB financial statements and the price of $3.5 billion seems absurdly low. 

At the current growth rate(s), one has to wonder when LinkedIn will reach $1.3 billion in cash and $300+ million in annual free cash flow?  Will it ever? 

It seems that insiders at both companies are clearly aware of the difference between perception and reality.

Thanks to stock repurchases, Dolby’s shares outstanding are 5% lower than they were a year ago and 7% over the last 2 years.  Nice to see that Dolby isn’t content to turn itself into a glorified savings account just yet.  They have grudgingly put some of this cash to work.  All that cash is a first-class problem that LNKD and plenty of others would love to have.

Ironically, LinkedIn insiders seem perfectly content to sell shares in sizable quantities. So perhaps LNKD is not so different from the other social networks after all.   

Disclosure: Long DLB, Short LNKD.

Wednesday, October 26, 2011

NFLX: Tilson Antes Up (again)

Whitney Tilson was very public about his short position in Netflix (NFLX). Come to think of it, is there anything that Tilson isn’t public about? Don’t get me wrong, I’ve always enjoyed his presentations, particularly when they agree with my investment stance.  We all like validation.

In truth, I agreed with Tilson’s negative view of Netflix' valuation.  Being short a few NFLX shares at the time added to the enthusiasm.  When Tilson went public it was big news.  How many Netflix skeptics were there?  It took guts.  Proving the point, several “friends” sent me emails with Tilson’s presentation attached.  That was the one entitled - Why We're Short Netflix.   My favorite line:  "In short, the stock is priced for perfection and any misstep would likely trigger a huge selloff. "

Anyway, all the emails I got said roughly the same thing. “Hey look, here’s another idiot like you who thinks Netflix is overvalued. Don’t you morons get it? This time it’s different!”  Ok.  They didn't really say that, but it felt that way.

Now I’ve long been annoyed with Tilson (not that you care) for trying to make the term “value investing” his own private brand. Probably it is just jealousy that I didn’t think of the Value Investing Congress, the Value Investing Newsletter, etc. myself.  But despite my view of Tilson as a great marketer, if not a great investor, I found myself on the same side of a trade with him for once.  And, honestly, it felt good to be hand-in-hand in solidarity with Mr. Value Investing himself.

Besides misery loves company.  (Here we will pause for anyone who has not looked at a chart of Netflix heading to $300 a share or around $15 billion in market value.)  And shorting NFLX was painful even for a chicken like me.

See my short positions are normally not very big. I don’t short for clients, but instead limit my shorts to my (poor) children’s college fund. If things go wrong, I can take comfort in knowing that my children are too young to know what their father is doing to (I mean “for”) them.  They think Daddy's job is boring and I don't want them to know how truly exciting (or terrifying) I sometimes can cause it to be!

So my Netflix short started small.  It even came and went sometimes with a modest gain or loss depending on my mood.  I felt very alone, lonely even. But as Netflix shares rose, I got more convinced and more serious about the thesis and my position grew.  It soon got big enough that the kids might actually miss out on a semester or two if I was wrong.  And for once, Whitney Tilson was my friend and partner, instead of the guy who stole value investing.

And then?  Well, right about that time, Tilson deserted me!  And not content to do so quietly, Tilson went public with “Why We Covered our Netflix Short” (as if anyone didn’t know).   It should have said simply "we've lost money and don't want to lose more", but instead the presentation argued that the facts about Netflix had changed.  My favorite lines: "We conducted a survey" and "Many things will have to go very right for the company to justify its current market valuation, but we no longer think it’s wise to bet against Netflix."

In actuality the valuation on Netflix was only getting more pronounced and the competition was just getting warmed up.  Tilson's Netflix reversal was about pain, more than it was about a letter from NFLX's CEO or any user surveys.  The pain of watching a position go the wrong way has a way of making all counter-arguments seem more valid.  The grass is greener on the other side and clients are pissed because you don't "get it"!  So Tilson caved in.  No more shorting Netflix, I promise!

Once again, I got emails. “See even Tilson has come around. You’re an idiot. Aren’t you tired of losing money too!?!?” And that obligatory attachment.

In truth, I was tired of losing money.  And I can’t prove I’m not an idiot.  But shorting Netflix got easier for me as the price rose.  Tilson's original short thesis on Netflix was well and truly intact to my mind.  So my position grew again.  Was it because I was mad at Tilson? Never.

Or because our family cancelled our Netflix account the day before the price increase? Yes.

Or because I got the feeling lots of other people were doing the same? You know it!

It also didn’t hurt that the company was trading at ever higher (and more ridiculous) valuations.

Even then it was not a worry free investment. Seemingly every day there was a rumor that Netflix was going to be bought out.  Google, Apple, the usual suspects.  Certainly anything was possible.  It pays to never underestimate a CEO who is desperate to “do a deal”.

Well, the phantom deal didn’t happen and Netflix is not riding high any more. It's been a swift drop from $300 to a more pedestrian value of $77 a share.  The relief for me (and my oblivious children) and the small measure of redemption that comes with it is nice. The kids got their semesters back (and then some).  But grad school willl have to wait.  I also closed my short in the low $100's, missing today's rout.

With Netflix's troubles in the news every day, I’ve thought about Tilson recently.  He should be doing his victory lap.  No doubt it would have a multimedia event that would dwarf my feeble effort!

It doesn’t make me feel good that Tilson missed this boat. We value guys need to stick together.  But instead, Tilson is on the sidelines in a game he started.  Every time I think about it the movie Rounders comes to mind.  Yes, I know it is random.

In the movie, Matt Damon plays a poker player. Viewers follow his adventures in life and poker, often as they relate to Teddy KGB played by John Malkovich, who is an underworld character apparently of Russian descent (hence the name). In one sequence, Damon’s character plays KGB and earns enough to pay off all his debts (owed to KGB and payable in blood or treasure).  Unfortunately, Damon's character plays on and predictably loses all his winnings.  Not one to resist kicking a man when he's down, KGB gloats in a thick Russian accent, saying: “You must be kicking yourself for not walking out when you could… bad judgment… don’t you worry son, it will all be over soon.”

It doesn’t hurt that Tilson looks a bit like Damon.  I wonder who will play Mr. Market in the Netflix movie?

In the final minutes of that Rounders movie Damon’s character finally takes down KGB, to which the Russian says in defeat… “He beat me… straight up… Pay him… pay dat man his money.”

Like any sap, I love a happy ending. After months of suffering and ridicule, I collected my Netflix winnings and moved on.  I was hoping Tilson could move on too.  One would expect him to avoid any mention of Netflix.  Fool me once... fool me twice?

But apparently steering clear of Netflix is NOT in the cards for Tilson (pun intended).  According to a headline today,  Whitney Tilson Is Buying Netflix.  The publicity machine rolls on. 

Of his latest foray, Tilson writes:

“it’s been frustrating to see our original investment thesis validated, yet not profit from it. It certainly highlights the importance of getting the timing right and maintaining your conviction even when the market moves against you. The core of our short thesis was always Netflix’s high valuation. In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it.”
I admire Tilson's latest conviction on Netflix and I can't wait to read the presentation, which will no doubt be titled "Why We're Buying Netflix".  In any case, I won't be following Tilson on this one.  You might say I know when to walk away.

The real lesson here has nothing to do with Netflix, but about conviction.  If you’ve done your homework, stick to your guns even if/when the going gets tough. Anyone can panic and it usually happens at precisely the wrong time.  In order to make real money in the market, more often than not you have to go against the crowd.  My Netflix short looked wrong for a long time before I was proved right.  If I'd relied on my emotions, I'd be looking at a fat loss.

Speaking of which, I've been short Amazon (AMZN) shares for quite some time.  And I've been adding to the position steadily.  If the after-hours move is any indication, it looks like the kids are going to get a few more classes paid for tomorrow.  Grad school anyone?

Disclosure:  Short Amazon